GBP weakens, growth data only heightens unease surrounding UK economic outlook

On the face of it, yesterday’s preliminary UK GDP seemed to be simply a repetition of the previous estimate, but behind the stagnant headline figures were some worrying signals for the UK economy.

The pound is on mixed form today. GBP/EUR is stuck around opening levels at €1.1228, while GBP/USD is also trapped in the starting range around US$1.3298. GBP/AUD is edging higher, having hit AU$1.7463, and GBP/NZD has made slightly more notable gains to hit NZ$1.9347. GBP/CAD has inched up to C$1.6932.

Read on to see why even a positive report from the retail sector only served to make the pound more gloomy yesterday…

What’s been happening?

The pound was on weak form yesterday after the release of the latest estimate for UK GDP during the third quarter of the year.

Although the headline figures remained unchanged on the initial estimate at 0.4% on the quarter and 1.5% on the year, this simply highlighted the fact that the UK economy remains on sluggish form.

Subsections of the report also proved concerning, showing a worse-than-expected slowdown in business investment and a weak performance month-on-month for the index of services.

Concurrent data from the Confederation of British Industry (CBI) showed a strong recovery in retail sales, but even here markets found reasons to be concerned; retailers reported laying off staff and worrying about a tough 2018.

GBP/EUR was pushed lower thanks to a slew of upbeat PMIs for France, Germany and the Eurozone, as well as a surprisingly upbeat outlook from the European Central Bank (ECB).

The PMI data continued to point towards the Eurozone recording its best growth rate in a decade this year, while the ECB’s latest monetary policy minutes revealed that members of the Governing Council were concerned about leaving quantitative easing open-ended.

Policymakers fretted that the markets would expect more extensions to the programme without a fixed end date, raising hopes that the board may soon decide to fix an exit from asset purchases in place.

The strength of the euro and Wednesday night’s release of Federal Open Market Committee (FOMC) meeting minutes weighed on the US dollar yesterday and allowed GBP/USD to advance.

Policymakers in the last meeting were split on the issue of inflation, suggesting that the outlook for monetary policy after December’s likely rate hike isn’t as rosy as hoped.

What’s coming up?

The pace of data slows today, so GBP/EUR and GBP/USD could be on the back foot given that only loans for house purchase figures are due from the UK.

However, given the largely negative forecasts for the November Ifo German economy surveys, the pound may find itself dragged higher as euro weakens.

Manufacturing, services, and composite PMIs from the United States today, meanwhile, could see Sterling under pressure versus the US dollar.