Recent UK economic releases have surprised analysts, with inflation and GDP slightly declining while claimant count change significantly exceeded expectations. Despite this positive data, market sentiment remains cautious due to concerns surrounding British public borrowing. This analysis from Hyperloop Capital Insights delves into the latest UK economic news and examines the technical outlook for GBPUSD and EURGBP.
Table Content:
Unexpected Economic Shifts
December’s headline inflation cooled to 2.5%, defying predictions of 2.6-2.7%. While premature to definitively declare inflation stabilized below 3%, recent months suggest easing upward pressure. Consumer demand outlook remains mixed amidst subdued confidence, with inflation slowing across food, beverages, restaurants, and hotels. This 2.5% figure aligns with the Bank of England’s forecasts.
Final Q3 GDP figures were revised downwards to 0%, contrasting with the initial 0.1% estimate. This weaker growth following a strong Q1 2024 recovery suggests the Bank of England might have greater flexibility for rate cuts compared to the Federal Reserve. Current expectations point towards cumulative BoE rate cuts of approximately 0.65% this year, subject to change as new data emerges.
The January 21st jobs report presented a significantly more positive picture than anticipated. While November unemployment ticked up to 4.4%, claimant count change was remarkably strong.
December saw only 700 new claimants, significantly below the projected 10,000+. November’s figures were also revised substantially downward to -25,100, contrasting with the initial +300. This represents the most significant single-month drop in claimants since May 2023.
However, December’s larger-than-expected budget deficit of approximately £17.8 billion – roughly £10 billion higher than the same period in 2023 – likely tempered market enthusiasm following the positive jobs report. This increased borrowing raises concerns about the UK’s fiscal health.
GBPUSD: Struggling to Maintain Momentum
Monday’s GBPUSD rally, coinciding with the US inauguration holiday, proved short-lived. The underlying technical picture remains largely unchanged. With the Bank of England projected to implement deeper rate cuts than the Fed this year, coupled with persistent concerns about the UK’s budget deficit and growth prospects, the fundamental outlook suggests further potential downside for GBPUSD.
While $1.21 continues to act as support, the recent test of the 38.2% monthly Fibonacci retracement near $1.233 appears to have failed. Neither the stochastic oscillator nor Average True Range (ATR) offer clear directional signals.
The next significant support level lies around $1.20. However, reaching this level before the upcoming Federal Reserve meeting likely requires a substantial surge in selling volume. Upcoming British consumer confidence data and flash PMI figures will be closely watched by GBPUSD traders.
EURGBP: Assessing Upward Momentum
The recent robust gains in EURGBP warrant scrutiny, particularly considering monetary policy. The current 1.75% interest rate differential favoring the pound is unlikely to narrow by more than 0.2-0.3% this year. However, negative sentiment towards the pound has intensified due to rising government borrowing, declining inflation, and stagnant Q3 economic growth.
EURGBP’s surge of over 1.5 pence in just two weeks is noteworthy. The 84.5p level, representing the late October high, now appears to function as resistance, evidenced by several prominent upper wicks. The 23.6% monthly Fibonacci retracement sits considerably higher at around 89p. A breakout above current resistance could potentially target last summer’s highs around 85.5p or slightly higher.
The significance of the 200-day Simple Moving Average (SMA) and the 38.2% Fibonacci retracement as support levels remains uncertain, given their prior failure to provide substantial resistance. The upcoming European Central Bank (ECB) press conference and preliminary eurozone inflation data will be crucial in shaping EURGBP’s trajectory.
Conclusion
Recent UK economic data presents a mixed picture, characterized by surprising declines in inflation and GDP, a strong jobs report, but overshadowed by concerns about public borrowing. These factors contribute to a cautious market sentiment. Technical analysis suggests potential further downside for GBPUSD, while EURGBP’s upward momentum faces challenges. Upcoming economic releases and central bank announcements will be critical in determining the future direction of these currency pairs. Hyperloop Capital Insights will continue to monitor these developments and provide timely analysis.
