General, Market Event

Technical Analysis: Brexit uncertainty weakening the economy?

Michael Baker, Tuesday, 12 February 2019

Weakening economy and ‘Brexit’ uncertainty paint dull December GDP numbers, inflation and retail sales indicators up next.

GDP figures 

A busy week for sterling started on Monday 11 February with the ONS (Office of National Statistics) releasing their quarter 4, 2018 GDP estimate. GDP (Gross Domestic Product) measures the value of goods and services produced in the UK and uses that as a key indicator for economic growth. 

The main headline reading in the report showed a slowdown in growth, with the quarter on quarter figures showing the UK grew by 0.2% in the final quarter of 2018, compared to expectations of 0.3% by city analysts. The latest quarter reading shows a pull back from the Q3, 2018 reading of 0.6% growth. GDP contracted by 0.4% in the final month of 2018 owing to a large pullback in construction and manufacturing. 

The last time we saw declines in services, production and construction in a single month was back in September 2012. Monthly GDP estimates are much more volatile than quarterly GDP estimates, with almost one in every four months in the past 21 years showing negative GDP growth (data from ONS).

GBP/USD

Cable (GBP/USD) reacted negatively on Monday with trading occurring around 1.2930, before dropping to 1.2894 and then bouncing back again. It was only in the afternoon when prices forced through the lows and eventually traded down at 1.2832 in Tuesday's (12/02/19) session. The move down has matched the slightly disappointing sentiment attached to the overall report. Despite the headline number coming in just below analyst estimates, it’s the monthly estimate that’s likely to be attributed to Brexit and global headwinds. 

Individual sectors that seem to be under pressure include both cars and steel. In the recent PMI release for the global sector, a remarkable downturn is shown in these sectors, stating that automobiles & parts and metals & mining are experiencing large contractions. 

This trend is being seen across many economies. The UK’s growth in the fourth quarter expanded 1.3% year over year, which was its weakest growth since the second quarter of 2012. In comparison to other countries in the EU, Spain has seen a 2.4% increase with Austria showing growth of 2%, but these are way ahead of Belgium at 1.2%, Germany who are forecasted to come in around 1% and France at 0.9%. Italy is way below the pack at 0.1% and the eurozone area as a whole printing 1.2% y/y in Q4.

CPI (Wednesday)

CPI was released today at 1.8% y/y reading (13/02/19) this indicates that inflation is weakening, and this may affect the tightening of monetary policy. The retail sales reading is also due on Friday 15 February – which is likely to add more volatility to sterling if it is out of line. 

Retail sales are forecasted to show a month on month increase of 0.2% which is much better than the 0.9% drop we saw last month. GBP/USD is again on the back foot since pulling back from the 38.2% fib retracement, which held the highs back on the 23 Jan. We have found support at a multiple daily low now which has been holding since 14 Jan with only one small blip through. 

As further major economic releases come out along with Brexit updates, it's possible we could push lower - look for 1.2722/2654 as the possible next support and then the 2018 lows between 1.2480/2434. Positive news will bolster sterling with a break above the daily trend resistance at 1.3140, setting us up for another move on the 38.2% fib at 1.3206. We'll then start to move into previous major resistance areas between 1.3265, 1.33 and 1.3368 if we push on higher. The 50% fib sits at 1.3430.

 

GBP/USD Daily Chart

GBPUSD Feb 12

Source: ETX Capital

For Further information on this article please contact our analyst and author Michael Baker: michael.baker@etxcapital.com.

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