GBP/USD yawns after strong UK GDP

• UK GDP rebounds to 0.3%, but economy remains weak
• US inflation hotter than expected at 3.4%

The British pound is showing limited movement on Friday. In the European session, GBP/USD is trading at 1.2769, up 0.05%.

UK GDP bounces back in November

The British economy grew in November by 0.3% m/m, rebounding from a 0.3% decline in October and edging above the market estimate of 0.2%. This was the sharpest GDP growth since July and was driven by stronger activity in services, retail sales and manufacturing. The news was not as good from a three-month snapshot, however. The economy contracted 0.2% in the three months to November, unchanged from the previous release and missing the market estimate of -0.1%.

The December GDP release will answer the question of whether the UK economy is in a shallow recession. Third quarter GDP was revised to -0.1% and if Q4 also posts negative growth, the economy would technically be in a recession. Even if the economy manages to avoid a recession, it will likely point to stagnation.

The weak UK economy presents the Bank of England with a dilemma. The BoE is under pressure to lower rates to kick-start the economy, but inflation is running at a 3.9% which is almost double the 2% target. The BoE would prefer to maintain a ‘higher for longer” rate path and let restrictive rates continue to push inflation lower. The central bank is likely to keep interest rates on hold at the next meeting on February 1.

US inflation higher than expected

In the US, inflation was higher than expected in December, with a gain of 3.4%. This was a rude surprise for the markets, which have become accustomed to inflation heading lower. The Fed won’t be losing sleep over the upswing, as Core CPI, which is a better indicator of inflation trends, dipped lower to 3.9%.

The rise in US inflation is a reminder that the battle to bring inflation back to the 2% target will be bumpy. The Fed has done an admirable job in lowering inflation but the final stretch is looking to be the most difficult. Services and housing inflation remains sticky and deflationary pressures from goods and energy have been fading.

The markets have pared their expectations for a March rate cut to around 70% but the Fed has been pushing back against these expectations. Cleveland Fed President Mester said on Thursday after the inflation report that it was “too early” to cut rates in March because the inflation release showed that restrictive policy was needed to bring down inflation to the 2% target.

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GBP/USD Technical

• GBP/USD is putting pressure on resistance at 1.2795. Above, there is resistance at 1.2826
• There is support at 1.2742 and 1.2711

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