Pound Sterling remains on backfoot amid mix UK GDP, factory data

• Pound Sterling faces pressure due to multiple headwinds.
• The UK economy remained stagnant in Q3 while economists forecasted a 0.1% contraction.
• Business investment by UK firms fell sharply in Q3 due to higher borrowing costs.

The Pound Sterling (GBP) is expected to continue its losing streak for the fifth trading session as the market participants anticipate a sharp slowdown in the United Kingdom economy. The British economy managed to avoid de-growth in the third quarter of 2023 but remained stagnant as firms were reluctant to hire job-seekers on a permanent basis and plans for capacity expansion were scrapped due to poor demand outlook. Higher interest rates by the Bank of England (BoE) and stubborn price pressure have squeezed the budgets of households.

Apart from the economic turmoil, dovish expectations for the interest rate outlook from BoE policymakers and dismal market sentiment are weighing on the Pound Sterling. BoE Chief Economist Huw Pill said the possibility of rate cuts in mid-2024 “doesn’t seem totally unreasonable” due to fears of an excessive slowdown. The market mood turned downbeat after Federal Reserve (Fed) Chair Jerome Powell said the current level of interest rates is not adequate to bring down inflation to 2%.

Daily Digest Market Movers: Pound Sterling remains vulnerable on mixed UK data

• Pound Sterling faces pressure as the UK GDP in the third quarter remained stagnant while investors forecasted a contraction by 0.1%. In the second quarter, the economy grew by 0.2%.
• Preliminary GDP grew at a steady pace of 0.6% YoY in Q3, marginally higher than expectations of 0.5%. The monthly growth rate in September was similar to August's GDP of 0.2%. Investors had anticipated a decline of 0.1%.
• In addition to Q3 GDP data, the Office for National Statistics (ONS) has reported factory data for September.
• Monthly Manufacturing Production grew at a slower pace of 0.1% in September against expectations of 0.3%. In August, output from manufacturing activities contracted by 0.7%. The annual Manufacturing Production rose by 3.0% versus. expectations of 3.1%.
• Industrial Production remained stagnant in September, on a monthly basis, against a 0.5% contraction in August. Economists forecasted a growth rate of 0.1%. The annual data rose by 1.5%, outperforming expectations of 1.1%.
• Preliminary Total Business Investment contracted significantly by 4.2% in Q3 against expectations of a 3.5% decline. In the second quarter, business investment grew by 4.1%. Investment by firms in capacity expansion fell after a two-quarter increase as higher borrowing costs have forced them to postpone their expansion plans.
• Though the UK economy managed to avoid a decline in growth in the July-September quarter, chances of an excessive slowdown in the UK economy are high as firms hesitate to widen the scale of operations and hire permanent payrolls due to a sharp decline in consumer spending.
• The Pound Sterling remains under pressure as dovish expectations for interest rates by the Bank of England (BoE) grew sharply after commentary from Chief Economist Huw Pill.
• Huw Pill warned that higher interest rates for a sufficiently longer period to tame inflationary pressures could result in an excessive slowdown in the economy. While discussing cutting rates, Pill said that he expects rate cuts in mid-2024.
• In the latest forecasts, the BoE said that the economy will be stagnant in the next two years and a mere 0.1% growth will be seen in 2026.
• After factory data, investors will shift focus to the labor market and inflation data, which will be published next week.
• Meanwhile, the US Dollar Index (DXY) aims to extend recovery above the immediate resistance of 106.00, supported by hawkish remarks on interest rate guidance by Federal Reserve (Fed) Chair Jerome Powell.
• Jerome Powell leaned towards raising interest rates further, claiming the battle against stubborn inflation was far from over.
• Apart from Jerome Powell, interim Bank of St. Louis Federal Reserve President Kathleen O’Neill Paese said "It would be unwise to suggest that further rate hikes are off the table".
• This week, commentaries from Fed policymakers remained in the spotlight due to the light economic calendar. Next week, the US inflation data will be keenly watched.

Technical Analysis: Pound Sterling trades at a make or a break near 1.2200

Pound Sterling trades at a make-or-break level near the breakout region of the symmetrical triangle chart pattern formed on the daily timeframe. The GBP/USD pair hovers around the 20-day Exponential Moving Average (EMA), which trades around 1.2230. The broader appeal for the Cable is bearish as the 200-day EMA has started sloping south.