The British pound edged lower on Thursday. In the European session, GBP/USD is currently trading at 1.2205, down 0.22%.
UK GDP Posts Weak Gain of 0.1%
The UK economy climbed out of negative growth for the first time in three months but not by much. After GDP contracted by 0.1% in September and October, November saw a small gain of 0.1%, missing the market estimate of 0.2%. In the three months to November, GDP showed no growth.
The small uptick in growth in November was welcome news for the government but the economic outlook is not very bright. The recent “tax and spend” budget will see tax increases take effect in April, including a rise in employer National Insurance contributions. This will hurt the business sector and many firms will cut back on spending and investment, which in turn will dampen economic growth. Inflation remains high and combined with low growth, stagflation is a real danger.
Another headache for the government is Donald Trump, who has promised to slap tariffs on US trading partners. The UK is heavily reliant on its export sector and a trade war with the US would be devastating for the fragile UK economy. Also, Trump’s protectionist trade policies could lead to higher inflation which could derail much of the progress made to contain inflation. This week’s soft UK inflation and GDP reports have raised expectations that the Bank of England will lower interest rates at the next meeting on Feb. 6.
In the US, December’s inflation release presented a mixed picture, as headline CPI rose for a third straight month, while core CPI eased slightly. Expectations for a rate cut rose in the aftermath of the inflation report, sending the US dollar lower against many of the majors.
GBP/USD Technical
- GBP/USD tested resistance at 1.2242 earlier. Above, there is resistance at 1.2310
- 1.2176 and 1.2108 are the next support levels