UK GDP Declines Less Than Expected; Outlook for Pound Remains Bearish
The final release of UK Q4 GDP reversed the second prints downward revision to -0.6% and confirmed the flash reading of -0.5% quarter-on-quarter. The final reading showed upward revisions in the services and factory output sectors which aided the headline figure. The Office of National Statistics (ONS) said that excluding the impact of the coldest winter weather in a century growth was “broadly flat”. These comments underscore the OBR’s lowering of their growth forecast for the UK as the overall picture remains lackluster. Additionally, the Bank of England has held off raising interest rates to combat accelerating inflationary pressures (last in at 4.4% y/y more than double the central banks 2% target) to help provide support for the faltering recovery, saying that there was “merit in waiting” to understand the full impact of government budget cuts and rising oil prices on the economic recovery.
Production output growth was revised to 0.8% in Q4 from 0.7% and the drop in services was pared to 0.6% from 0.7% according to the ONS breakdown. Consumer spending continues to be highlighted for its weakness, and declined 0.3% in Q4 after being flat in Q3. This weakness comes as a result of steep government budget cuts are set to cost 330,000 public-sector workers their jobs. Amid spiraling consumer confidence and insecurity about jobs UK consumers are keeping their wallets firmly shut.
The pound failed to draw any support from the better than expected release, instead it fell back to 1.6005 from the 1.6030 region pre-release. After yesterday’s bearish break and close below the psychologically important 1.6000 level some bulls are likely to have thrown in the towel after repeatedly failing to push the pair above the 1.6300 level convincingly. As Cable takes on a more bearish tone bears will be looking down toward the 1.5800 region as an initial target area. It remains to be seen if the interest rate speculation that has been driving gains, and keeping dips well bid, can contain the downside.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.