The pound sterling has maintained its strong lead against the US dollar, fueled by news of a smaller-than-anticipated contraction in the UK economy. According to the data release, UK GDP fell by 0.1% in May 2023, following a 0.2% uptick the previous month. Economists had predicted a steeper decline of 0.3%. This indicates that the UK government still has a chance to maintain the economy at a relatively good level, considering the policy moves by the Bank of England in 2022. The monetary policy gap between the Fed and the Bank of England has had a positive impact on the pound sterling and will continue to support it for some time.
This latest development comes as a surprise to observers - the UK has managed to dodge a recession that had been anticipated by economists at the Bank of England and the International Monetary Fund. Although the pound has advanced, this will likely create additional problems in the future, as it is expected to lead to further inflationary pressures, forcing the central bank to take more measures aimed at cooling the economy through sharp increases in borrowing costs.
Some economists anticipate sluggish consumer growth until 2024, as households face numerous economic obstacles. However, strong wage growth and a decrease in inflation could resume real wage growth, although the burden of higher mortgage expenses and rental fees may exert considerable strain on household budgets. Many households will soon face the end of the favorable period of fixed interest rates on their mortgages, which began due to the coronavirus pandemic.
Undoubtedly, economists remain cautious about focusing too much on monthly figures, but they also indicate that the UK has experienced zero growth in the past three months. Even optimistic analysts are now predicting stagnation. The released data for May shows zero growth over the three months leading up to May, highlighting the fragile state of the UK economy. The latest quarterly economic report indicates that the majority of companies have yet to report any improvement in business conditions, which is bound to impede future economic growth rates.
Traders will now closely monitor the June data, noting that a strong upward rebound may indicate hidden strength. On the other hand, lackluster data could signal the beginning of a prolonged decline. To trigger a contraction in production during the second quarter, a further decline of 0.1% in June would be required.
The report has also highlighted a 0.9% decline in housing and food services sectors after a robust performance in April. The manufacturing and construction sectors also recorded a 0.2% decline, albeit less severe than the 0.5% decrease witnessed in the previous month.
As for the technical picture of GBP/USD, demand for the pound sterling remains fairly strong, indicating the continuation of a bullish market trend. A GBP/USD uptrend can be expected after the pair hits 1.3140, as a breakout above this level will pave the way for further recovery towards 1.3170. Afterwards, a more pronounced upward surge to around 1.3200 is possible. If the pair declines, bears will attempt to take control below 1.3090. If successful, a breakout below this range will strike a blow to positions of bullish traders and push GBP/USD towards the low of 1.3040, potentially targeting 1.2990.
Regarding the technical picture of EUR/USD, bulls must push the pair above 1.1270 and consolidate there in order to maintain their control of the market. This will allow for a move towards 1.1310. Such a breakthrough would open the way towards 1.1310. However, without strong Eurozone statistics, it will be quite challenging to achieve this. If the trading instrument declines, significant action from major buyers is expected near 1.1215. If no significant activity occurs there, it would be advisable to wait for EUR/USD to hit new lows at 1.1170 or open long positions at 1.1130.
