British pound shrugs as UK economy rebounds

• UK GDP bounces back with 0.2% gain
• FOMC minutes: Restrictive policy to continue until inflation falls to target

The British pound continues to have a quiet week. In the European session, GBP/USD is trading at 1.2302, down 0.08%.

UK’s GDP rises 0.2%

The UK economy grew by 0.2% in August, rebounding from a revised 0.6% decline in July. The gain of 0.2% matched market expectations and the British pound is showing little reaction.

The services sector has become the primary driver of growth for the UK economy. In August, services rose 0.4% m/m and partially offset declines in construction and manufacturing. Services declined in August by 0.6% m/m and GDP declined by the same figure. The three months through August painted a more positive picture, with GDP rising by 0.3%, up from 0.2% in the previous release and matching the market estimate. Construction, manufacturing and services all reported gains.

The Bank of England meets next on November 2^nd, ahead of next week’s UK employment and inflation reports. These releases will be key factors in the BoE’s decision – if they point to the economy cooling, the BoE will have further support to hold rates for a second straight time. Conversely, strong data would put pressure on the BoE to increase rates.

The Federal Reserve released on Wednesday the minutes of the September meeting, in which the Fed held rates. The minutes showed some dissension within the FOMC, with a majority favouring a rate hike “at a future meeting”, with the minority saying that no further hikes were necessary. However, there was unanimity that rate policy should remain restrictive until it was clear that inflation was “moving down sustainably” towards the 2% target.

The question is whether the minutes have become dated, as things have changed a lot since September. US yields have climbed sharply, there is a war in the Middle East and the US economy is showing cracks. Fed members have been sounding more dovish, noting that higher yields have raised borrowing costs, which could put a brake on growth and curb inflation without the Fed having to increase rates. The future markets have slashed their expectations for a rate hike before the end of the year. The odds in mid-September for a rate hike stood at 41% but have fallen to 26% currently, according to the CME FedWatch Tool.

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GBP/USD Technical

• 1.2179 and 1.2097 are providing support
• GBP/USD tested resistance at 1.2321 earlier. Above, there is resistance at 1.2403

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