The greenback fell against the pound yesterday after the release of worse-than-anticipated producer price index data. The pound’s gain was also fueled by a series of better-than-anticipated economic data from the UK, even though none of them are on the positive side. In the past 24 hours, the GBP/USD pair has declined from a high of 1.2340 to a low of 1.2220.
The preliminary data published by the UK Office for National Statistics (ONS) indicates that the country’s economy contracted by 2% q-o-q in the first quarter of 2020, compared with no change in the earlier quarter. Economists had anticipated the economy to shrink by 2.6% in the first quarter.
It is the biggest contraction since the fourth quarter of 2008. On a y-o-y basis, the GDP shrank by 1.6% in 1Q 2020, reflecting the steepest decrease since Q4 2009, when it also declined at the same rate. Household consumption decreased by 1.7% in Q1 2020, the biggest contraction since Q4 2008, along with decreases in government consumption, fixed capital formation, and trade volumes.
On a monthly basis, the GDP contracted 5.8% in March, compared with a contraction of 0.2% in the earlier month. Analysts had anticipated the economy to contract by 7.9% in the reported month.
Construction output contracted 5.9% m-o-m in March, following a 2.1% contract in the earlier month. The reported figures missed economists’ forecast for a contraction of 7.1% in March. The decline was caused by a 6.2% drop in fresh work and a 5.1% fall in repair and maintenance. It was the largest monthly decline on record since the series was published for the first time in January 2010.
Construction output declined by 2.6% q-o-q in the first quarter of 2020, led by a 2.1% drop in fresh work and a 3.5% decline in repair and maintenance. Fresh orders increased by 11.8% in the first quarter of 2020, compared with the fourth quarter of 2019. The increase was mainly because of an increase in new housing and other work, which grew by 12.5% and 11.5%, respectively.
Index of Services (IoS) declined 1.9% m-o-m in the first quarter, compared with a 0.2% increase in the earlier three months. Automobiles and repair of motor vehicles contributed minus 0.41% to the IoS.
Similarly, manufacturing production fell 4.6% m-o-m in March, compared with a 0.3% increase in the earlier month and better than the 6% contraction anticipated by economists. The decline was driven by a 20.5% decline in transport equipment and 34.3% fall in motor vehicles, trailers, and semi-trailer sectors. Of the 13 industries, 10 of them contracted, reflecting the overall broader weakness.
Another economic data published by the ONS indicates that the goods trade deficit widened to £12.50 billion in March, from a trade deficit of £9.8 billion in the earlier month. Economists had anticipated the trade deficit to inch slightly to £10 billion.
Industrial production contracted 4.2% m-o-m in March, compared with a 0.1% decline in the earlier month. Economists had anticipated the industrial production to contract by 5.5% for the reported period. While mining and quarrying contracted by 11.5%, electricity and gas declined by 1.5%.
In the US, the Bureau of Labor Statistics reported that the producer price index fell 1.3% m-o-m in April, compared with a 0.2% decline in the earlier month. Economists had anticipated the producer price index to decrease by 0.5%. It is the largest decrease since the institution started publishing the data in 2009.
The core producer price index declined 0.3% m-o-m in April, after increasing by 0.2% in the earlier month. Economists had anticipated the core producer price index to contract by 0.1%.
The weak economic data from both countries are expected to keep the GBP/USD pair range-bound in the short-term.
Technically, the price chart indicates that the GBP/USD pair is facing resistance at 1.2470. The next major support is anticipated only near 1.1875. Additionally, the currency pair is also trading below its 50-day moving average. The stochastic oscillator is also in the bearish zone. Therefore, we are anticipating the GBP/USD pair to remain bearish in the days ahead.
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.
