GBP/USD made a strong bearish reversal this week after a strong rally last week. Yesterday’s softer UK employment report and the stronger US CPI inflation numbers weighed on the GBP, sending the price 150 pips lower, but the decline stalled at 1.2748, as GBP traders were waiting for today’s UK GDP report for January.

GBP/USD H4 Chart – The Decline Stopped Above the 50 SMA

The monthly Gross Domestic Product (GDP) in the UK was expected to grow by 0.2% in January, a turnaround from the -0.1% observed in December. The December release marked a contraction following a 0.2% gain in November, aligning with Q4 data that indicated the UK entered a technical recession at the end of 2024. However, analysts were anticipating that the January data would signal the UK’s departure from the minor recession of the previous year.

A large part of the anticipated 0.2% expansion in January should be due to the robust 3.4% increase in retail sales during the same period. The Services and Manufacturing PMIs are also improving. But this positive economic outlook is still unlikely to significantly influence market pricing, given the BoE’s continued focus on real wages and service inflation as key determinants of monetary policy, as BOE’s Baily highlighted in his speech.

Andrew Bailey Speaking on the Economy and BOE Policy:

• The question of policy restrictiveness is now crucial, indicating a shift in focus toward assessing the appropriateness of current monetary policy measures.
• Bailey emphasized the importance of determining the duration for which policy needs to remain restrictive, suggesting ongoing evaluation of economic conditions and policy effectiveness.
• He noted that the world remains more uncertain than usual, highlighting the need for flexibility and adaptability in monetary policy.
• Bailey expressed confidence in the effectiveness of monetary policy, suggesting that it is fulfilling its intended role.
• He mentioned that inflation expectations seem to be well anchored, indicating that the public’s perception of future inflation remains stable.
• Bailey stated that there has been limited evidence of rising unemployment as a means to alleviate inflationary pressures, suggesting that other factors may be influencing inflation dynamics.
• He highlighted reduced concerns about the embedding of second-round effects, implying that the risks of inflationary pressures spilling over into broader economic conditions have diminished.

UK January monthly GDP released by ONS – 13 March 2024

• January monthly GDP +0.2% vs +0.2% m/m expected
• Prior -0.1%
• GDP -0.1% vs -0.1% 3m/3m expected
• Prior -0.3%
• Services +0.2% vs +0.2% m/m expected
• Prior -0.1%
• Industrial output -0.2% vs 0.0% m/m expected
• Prior +0.6%
• Manufacturing output 0.0% vs 0.0% m/m expected
• Prior +0.8%
• Construction output +1.1% vs -0.1% m/m expected
• Prior -0.5%

GBP/USD Live Chart