UK GDP Reaction

Economic figures released over the last couple of days suggest that the UK economy continues to show warning signs, and businesses look to shore up their finances.

---------------

The reaction

There was a plethora of data coming out just before the markets opened yesterday, but Q1 figures stood out. While they were the final reading and were unchanged from the preliminary versions at 0.8%, the pound took a bit of a spill initially but reversed afterward only to stabilise. The main point is that even though the economy posted growth, the pace was slowing.

That dovetailed with other data released at the same time. The ONS reported that inflation-adjusted household income dropped for the fourth time in a row - the worst performance since the 1950s. The vaunted post-pandemic recovery hasn't been seen among British consumers. Granted, a large portion of the decline is due to the erosion from inflation.

Where things are headed

The principal reason given for loose monetary policy and increased government spending is to spur demand. But if inflation is eating up all the "extra" money, then demand can falter. With interest rates rising, firms will find it increasingly costly to take out loans to finance growth. The expected economic growth from the increased money in circulation will not materialize under those conditions.

Another worrying data point that came out before the start of trading was B&M's sales data. It's particularly relevant that budget retailers are seeing net sales drop by almost 20%, and this bodes ill for other supermarkets who will be reporting during this month's earnings season. Nationwide house prices also showed that prices were starting to falter, leading to pressure on the homebuilding sector as well.

Golden pocket at risk of breaking

GBPUSD has bounced off the 61.80% Fibonacci retracement of the $1.1930 – $1.24 leg but the 50% equivalent near $1.2170 has acted as a short-term top.

The upside pressure has indeed waned but without losing the $1.2092 support the bullish CCI divergence could manifest into a move towards the 38.2% Fibonacci near $1.2226. There lies strong resistance as the 50H4 average meets a major ratio. Above it, the descending trendline connecting $1.24 and $1.2330 is one of the targets, with the others being the lower highs themselves.

On the downside, breaking below $1.2092 will open the path toward $1.1930 and the round level of $1.19. Any downside contained above $1.1930 could be supported by the CCI indicator, but if the divergence fails and the $1.1930 flips into resistance, the bearish implications will likely be more severe. In the interim, the $1.20 round level is major support and could offer either a reversal or a short-term relief rally.

Source: Spreadex trading platform

Key takeaways

The UK economy grew in Q1 but consumers continue to be affected by inflationary pressures.

With the traditionally beneficial use of demand-spurring monetary expansion and government spending squeezed in a tightening of monetary policy, inflation hinders growth, spelling bad days ahead for the UK. Coupled with worrying retail and homebuilding data, the pound's initial reaction was to fall after the final GDP reading but eventually, it found stability - for now.