The British pound is extending its slide against the US dollar, but today's forward-looking data from Gfk pointed to a fourth straight month of recovery in UK household confidence even amid double-digit inflation.
The report indicated that the GfK consumer confidence index rose another three points to -27, the highest level since February 2022. The agency said that such figures reinforce confidence that the UK will avoid a recession that seemed almost inevitable at the end of last year, as consumer sentiment declined to 50-year lows.
As a reminder, the UK gross domestic product grew by 0.1% in the first quarter compared to the fourth quarter of 2022, while the March figure showed a decrease of only 0.3% after a flat reading in February and a slight increase in January, which was revised upward.
This is certainly good news for Prime Minister Rishi Sunak whose Conservative Party must regain trust among the Britons to avoid defeat in next year's general election. According to a poll of economists released on Friday, the chance of a recession over the next 12 months is just 43%, the lowest since last June.
Nevertheless, consumers and households are still struggling with dwindling real incomes, and many of them have yet to be hit by high borrowing costs. The pressure on household budgets was highlighted in a separate report from the Resolution Foundation think tank, which indicated that food prices will soon surpass energy bills and become a major driver of inflation.
"The overall score of minus 27 means we are still deep in the red and far from being positive about this figure," said Joe Stayton, director of the client strategy at GfK. "However, the overall trajectory this year is positive and reflects a stronger underlying financial picture in the UK than many realize."
GfK noted that confidence in the economic outlook has improved to its highest level since the end of 2021. Household sentiment about their future personal finances was at its highest level in 16 months, with more people willing to make big purchases.
But there are those who believe that the cost-of-living crisis in the UK is not over yet and that we need to wait for a new acute phase in the summer. As I noted above, the main shock will be food prices, which will surpass the shock from electricity bills. What remains unchanged is that people with low to middle incomes will bear the brunt of the crisis.
As for the technical picture of GBP/USD, the sterling remains under pressure. We could rely on a rally provided that the bulls capture the level of 1.2415. Only a breakout of this level will cement the hope for a further recovery to 1.2445. Once this scenario comes true, we could foresee a more rapid rally to 1.2490. Alternatively, in case GBP/USD falls, the bears will try to regain control over 1.2380. If they succeed, a breakout of this level will deal a blow to the bulls' ambitions and push the instrument to the low of 1.2350. A lower target is seen at 1.2310.
Speaking of EUR/USD, the bear market is still valid. If the bulls want to enter the market, they will have to seize 1.0790 and settle the price above 1.0750. This will open the door to 1.0820. From this level, EUR/USD will be able to climb to 1.0860, though it will be quite a challenge without strong fundamental statistics from the Eurozone. In case the currency pair declines lower, I would expect some activity from the buyers only at around 1.0750. If the bulls are sluggish there, it would be a good idea to wait until the low of 1.0715 is updated or open long positions from 1.0670.
