Pound slips below 1.35 ahead of UK GDP

The British pound is down considerably on Wednesday. GBP/USD is currently trading at 1.3472, down 0.63% on the day.

Markets await GDP

Thursday brings a data dump out of the UK, and the results could play a factor as to whether or not the Bank of England decides to raise rates at the December policy meeting. Market participants are still scratching their heads after the BoE kept rates at 0.10% at last week’s meeting. Governor Andrew Bailey has been sending out strong hints about raising rates, but when crunch time came, not only did the BoE balk, but Bailey voted with the 7-2 majority against a rate hike.

The key release on Thursday will be the GDP report for Q3. A strong reading will reinforce the outlook that the BoE will indeed raise rates and would likely boost the pound. Conversely, an underperformance could see investors question whether the BoE will raise rates and the pound could lose ground. The consensus for Q3 GDP is a modest 1.5% q/q, vs the 5.5% jump in the second quarter. On an annualized basis, the estimate for Q3 stands at 6.8%, vs 23.6% in Q2. However, the huge gain last quarter was in comparison to GDP at the height of the Covid pandemic. If GDP is within expectations, the markets should be satisfied that a rate hike is coming shortly, as the BoE has promised, and the pound should be able to hold its own or even gain some ground.

Another potential market-mover is Manufacturing Production for September. The consensus stands at 3.1%, vs 4.1% in August. A reading below expectations could raise concerns about manufacturing problems, such as bottlenecks in supply chains, which could weigh on sterling.

In the US, inflation is not showing any signs of cooling off. Headline CPI rose 4.6% y/y, compared to 4.0% in September. Core CPI jumped 6.2%, up from 5.4% in September. The high numbers have given a boost to the US dollar, as the Fed will come under increased pressure to bring forward its timeline for a rate hike. On Tuesday, Fed member James Bullard said that he expects two rate hikes in 2022. Granted, Bullard is one of the more hawkish Fed members. Still, as the Fed’s argument that inflation is transitory becomes harder to defend, we can expect other Fed members to call for an acceleration of the timeline for a hike.

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GBP/USD Technical Analysis

• GBP/USD is testing a monthly support level at 1.3474. Below, there is support at 1.3267
• There is resistance at 1.3654 and 1.3813

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