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UK GDP dropped modestly by 0.1% in the second quarter. To this end, this report could have hardy undermined a rally of the pound/dollar pair. However, it started losing momentum despite a buoyant rise in US stock indices. Moreover, GDP figures turned out to be better than the forecasts of Bloomberg analysts. Yet, the quotes grow or fall on expectations. Traders were hugely disappointed with a contraction in the UK economy. Now, market participants believe that a recession that the Bank of England has warned about is inevitable. Some analysts assume it may occur sooner than the BoE has predicted.
Hence, 4-decade high inflation and monetary policy tightening have triggered one of the biggest financial crises in half a century. As winter approaches, the UK is likely to face an energy crunch. According to Auxilione, UK households will have to pay an average of £5,000 for electricity in 2023. Gas prices have more than tripled over the past year. They are four times higher than their average seasonal levels over the past 5 years. Apart from that, the Brexit crisis is also weighing on the economy. Therefore, many analysts believe that an economic downturn is inevitable. The economic prospects of the UK look worse than most of the G7 countries. The economic indicators are likely to continue to decline.
G7 countries GDP
The Bank of England is now dealing with many issues. It needs to return inflation to the 2% target. It means that the regulator will stick to aggressive tightening. It will surely adversely affect economic growth. Politicians are casting doubt on the BoE's competency. Liz Truss, who is likely to become the next UK Prime Minister, intends to revise the BoE's mandate and monitor such indicators as the money supply and real GDP. It is a rather controversial decision given that major central banks abandoned this approach in the 1980s.
Traders have already begun to price in a gradual slowdown in aggressive rate hikes. The same situation has recently occurred with the Fed. However, in mid-August, investors had to revise their forecast of the Fed's monetary policy. Earlier the US dollar faced bearish pressure due to expectations of a softer stance in 2023. However, the Fed confirmed its commitment to raise the interest rate in the long term. Therefore, traders rushed to sell off the pound sterling due to divergence in the monetary policy. The US economy remains resilient as the country is a net exporter of natural gas. To this end, its prospects are brighter than the UK's.
On August 19, the UK will unveil the inflation, labor, and retail sales reports. They may stir up market volatility. However, in my opinion, the GBP/USD pair will be more vulnerable to changes in the US stock indices. They usually boost risk appetite.
Judging by the 1H, 2H, and 3H intraday charts, the ongoing correction is likely to end soon. So, the pair may resume a downward movement. It is better to open short positions if the pair drops below the support level of 1.2055.
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