UK Economy Shrinks Less Than Expected in May, GBP/USD Breaches 1.3000

UK GDP KEY POINTS:

UK real GDP monthly is estimated to have fallen by 0.1% in May 2023 after growth of 0.2% in April 2023. Looking more broadly at the data and GDP has shown no growth in the 3 months to May 2023. Monthly GDP fell by 0.4% in May 2023 compared with the same month last year. For comparison, monthly GDP grew by 0.5% between April 2022 and April 2023. According to ONS data it is important to remember the Platinum Jubilee which resulted in an additional working day in May but 2 fewer days in June which could have a bearing on the final data print when compared to the same period in 2022.

UK Chancellor Hunt commented that the extra bank holiday had an impact on growth in May with inflation remaining a drag on economic growth prospects.

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The Services sector no growth in May 2023, following growth of 0.3% in April 2023. Overall, the services sector showed no growth in the three months to May 2023 compared with the three months to February 2023. The largest increase was a 1.1% increase in human health and social work activities which was largely offset by a 0.5% decline in wholesale and retail trade and repair of motor vehicles and motorcycles.

UK GDP is now estimated to be 0.2% above its pre-covid levels from February 2020.

Source: Office for National Statistics

UK GROWTH PROSPECTS FOR 2023 AND THE BANK OF ENGLAND

The Bank of England Governor Andrew Bailey spoke this week following a rise in wages in the UK which had seen rate hike expectations increase. Governor Bailey still believes the UK is on the correct trajectory in its fight against inflation sticking by his rhetoric that inflation is expected to fall significantly in Q2 of 2023. The Governor also stated that the economy as well as UK banks are coping at the moment despite the unprecedented rate hikes over the past 18 months.

Despite the fact that UK GDP is higher than pre-pandemic Feb 2020 level there remains a concern that the Bank of England will need to reach a more restrictive rate in order to bring down inflation. This could in turn lead the UK economy into a recession with Chancellor Hunts comments today reiterating the effects inflation is having on the economy. All eyes on the BoE now heading toward the August MPC meeting.

MARKET REACTION

The initial market reaction following the news has seen GBPUSD remain flat following yesterday’s rally as the psychological 1.3000 level was breached. Looking at the bigger picture from a technical perspective, GBPUSD price failed to close above the 1.3000 handle for now and failure to do so could see cable put in a retracement toward support at 1.2875.

Taking a look at the IG client sentiment data and we can see that retail traders are currently net SHORT on GBPUSD with 71% of traders holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment meaning we could see GBPUSD prices continue to rise following a short retracement to the downside.

GBPUSD Daily Chart, July 13, 2023

Source: TradingView, prepared by Zain Vawda

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda