GBP remains sluggish as UK growth stagnates

  • UK GDP flat in Q4: UK GDP showed no growth in Q4. This was broadly in line with expectations despite a worse-than-expected December decline.  

  • GBP has barely reacted but remains weak: The underperformance of GBP on major forex shows little sign of turning around.

  • FTSE 100 index remains a defensive choice: FTSE 100 has pulled back from all-time highs. However, US futures are flat this morning and this should help to restrict the initial downside in European indices.

UK growth is stagnating

First, the good news. The UK economy has avoided slipping into recession in Q4 2022. After a -0.3% decline in Q3, the UK economy was flat (i.e. had 0.0% growth) in Q4. This was broadly in line with expectations.

However, the month of December was disappointing at -0.5% MoM (which was worse than expected). With the economy in stagnation, there is little to cheer for the UK. For the year, 2022 GDP growth was a lukewarm +0.4%. 

The economy has been hamstrung by inflation above 10% and industrial action across swathes of the public sector. Inflation has shown tentative signs of peaking but continues to hit consumers in the pocket. 

 

The outlook for GBP remains weak

The performance of GBP remains very disappointing. Amongst major currencies, GBP is consistently towards the bottom of the pile.

Gauging major currencies versus the USD in the past month shows GBP as the worst performer. Performance has been especially poor in February.

The weakness in the economy is one factor. However, this has a knock-on impact on the Bank of England. 

The BoE hiked rates in every meeting in 2022. It also continued to hike by another 50 basis points in the meeting at the beginning of February (the Base Rate is now up to 4.00%).

However, there is a deep division among the BoE rate-setting committee, the Monetary Policy Committee. Silvana Tenreyro has called for no change in the last two meetings and is reportedly contemplating voting for a rate cut in the monetary policy meetings in the coming months. 

Tenreyro notes that the BoE’s forecasts suggest that inflation will fall to almost zero in the medium term. With other MPC members still hawkish, there is significant uncertainty over the path of BoE rates.

The BoE uncertainty and UK's sluggish economic growth leave the GBP floundering.

FTSE 100 is a defensive performer

The FTSE 100 index has risen recently (as all equity markets have). However, it has not been a star performer by any stretch.

This is not overly linked to the performance of the UK economy (just over two-thirds of FTSE 100 earnings are foreign). Instead, it has been the relatively defensive (lower growth) make-up of the index constituents that have been the issue.

 The higher growth-weighted markets such as NASDAQ, the S&P 500 and in Europe, the DAX have been much better performers.

However, this has come as risk appetite has been strong. In early February, the risk rally has been rocked. The more defensive and less volatile qualities of the FTSE 100 could help to restrict the downside.

GBP outlook is faltering, FTSE remains firm

GBP/USD

The sharp pullback in early February means that the market is now in a consolidation rectangle. 

  • Key resistance is up at 1.2447

  • A band of support at 1.1840/1.1960 is now the floor

However, the RSI recently fell to a 4-month low and now has more of a negative configuration. With Cable also trading under flat moving averages, this points towards a negative bias within the range and a likely test of the lows.

FTSE 100

The outlook remains positive. The near four-month uptrend is intact and an all-time high of 7953 was hit yesterday.

Momentum is strong on the daily RSI but is beginning to show early signs of fatigue. With the failure to decisively pull higher in recent days (long upper shadows on the daily candles), this could point to another easing back towards the uptrend.

There is good support in the c. 100 tick band between the key higher low at 7712 and 7818. On a technical basis, we continue to favour buying into supported weakness.

Support and resistance levels for major markets

 

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