Pound Plunges as UK’s Economy Contracts in November

Pound Plunges as UK’s Economy Contracts in November
January 14, 2020

The British pound declined against the greenback yesterday after the Office for National Statistics reported a contraction of the UK economy in November. The reported figures also missed analysts’ estimates. From a high of 1.3044, the GBP/USD pair declined to a low of 1.2960 in the past 24 hours.

The UK’s gross domestic product contracted by 0.3% m-o-m in November, after the economy expanded by 0.1% in September and October. Economists had anticipated the GDP growth to remain unchanged for the reported period.

In the three months leading up to November, the economy expanded by 0.1% on a q-o-q basis, after growing by a revised 0.2% in the three months to October. On the whole, according to ONS chief of GDP Rob Kent-Smith, the economy expanded marginally in the recent three months. However, the construction sector declined due to a slowdown in the manufacturing industry.

Kent-Smith pointed out that the economy has continued to slow down in the past year. Services output decreased by 0.3% in November, negating October’s 0.3% rise. It was the most significant decline since 2018. Economists had anticipated the output to grow by 0.1%.

In November, industrial production declined by 1.2% m-o-m after slowing down by 0.4% in the earlier month. Manufacturing recorded a monthly decline of 1.7% due to a sharp decline in car production, as factories closed their operations just before the October 31st Brexit deadline that was later postponed to January. Economists had anticipated industrial output to remain unchanged and manufacturing to decline 0.1% in November.

On a yearly basis, industrial production declined 1.6% in November, quicker than the 0.6% decline a month before. Similarly, the manufacturing output fell by 2%, from 0.3%. Construction output grew 1.9% m-o-m in November, contradicting the 2.2% drop in October. The reported figure represents the fastest monthly growth since January 2019. On a y-o-y basis, construction output dropped 2%.

A separate report from the ONS indicated a contraction in the visible trade deficit to £5.26 billion in November, from £10.94 billion in October. As a result, the economy posted £4.03 billion as a surplus trade balance in November, compared with a £1.33 billion deficit in October. The surplus was led by a £3 billion rise in exports of undesignated goods.

Overall, the UK economy is on a path to stall or shrink by 0.1% consecutively in the fourth-quarter, as per Andrew Wishart, an economist at Capital Economics. The economist believes that such a scenario opens doors for further rate cuts. Notably, an increasing number of BoE policymakers have started supporting an interest rate cut as the economy indicated signs of weakness.

While speaking to the Financial Times, Gertjan Vlieghe, an external member of the rate-setting committee (MPC), opined that the BoE would soon announce a rate cut. Vlieghe said, “Personally, I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other. I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.”

Last week, BoE’s soon-to-depart chief Mark Carney stated that the central bank has adequate room to slash benchmark interest rates by an aggregate 250 basis points and also boost the size of its asset acquisitions.

The historical price chart indicates that the GBP/USD pair is declining after facing resistance at 1.3090. The next major support is at 1.2920. The currency pair is trading below its 50-day moving average. Additionally, the stochastic indicator is also in the bearish region. Therefore, we are anticipating the currency pair to move down further.

GBP - technical analysis - 14th Jan 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins


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