The British pound edged lower closing at 1.29409 as yesterday’s data on U.K. economy weakens more than estimated earlier. Not surprisingly, it keeps decreasing moderately to 1.29088 as of 11:30 a.m. in Sydney while it seems ready to break to the upward channel formed after the dramatic rise on April 18th.
The sharper-than-anticipated slowdown in the U.K. economy in the first quarter is mainly due to the trade drag and flagging shoppers. Gross domestic product growth is set to be 0.2 percent, less than the 0.3 percent published late last month and much down from 0.7 percent at the end of 2016. Growth in services, the biggest part of the economy, and production were both revised down compared with the initial estimate.
According to the report coming from the Office for National Statistics, exports dropped 1.6 percent and net trade, knocking 1.4 percent off GDP, exerted a major drag on first-quarter growth as the deficit widened. Consumer spending also weakened much than before, with household activity adding the least to the economy since 2014.
The economic slowdown probably indicates that Brexit is hitting the economy as accelerating inflation coupled with muted wage growth puts the squeeze on households. For consumers and companies, there’s also a surprise election early next month, while the buildup to the Brexit negotiations has been marked by tensions over what type of deal Britain and the European Union will reach an agreement.
Given sterling’s depreciation, the poor performance of trade in the first quarter may help reinforce exporters’ margin, but there’s been limited impact on the broader economic picture. Governor Mark Carney commented of a “challenging time” ahead for consumers, and a survey this week showed that an Easter-driven pickup in retail sales in April hasn’t been sustained into this month.
Investors’ concern over the security of Britain would reinforce as the Manchester terror attack actually puts significant uncertainties in sterling movement, whose recent drop can be partially attributed to this attack.
For future movement investors should keep an eye on some important data released next week, including its consumer confidence, and U.S. change in non-farm payroll and unemployment rate.
Technically the moving for the pound entered into new stage after the breakout for the rectangular channel lasted for more than half a year. It is currently trading in an upward channel while the poor economic performance dragged the value of sterling, and if the breakout to the lower channel succeeds, further decline is likely to occur. Otherwise, if it fails and rebounds supported by the channel, traders may look for a long position in the short run but should be patient to the long-term performance for next breakout without putting much on it.
Chart 1: GBPUSD Daily
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