Worrying UK economic outlook weighs on sterling

The GBP/USD fluctuated and fell this week, weighed down by the strong U.S. dollar, and the deteriorating UK economic outlook also weighed on the pound. It is expected that the consumer price index in the UK will exceed 18% in early 2023, and the retail price index inflation rate will even soar to 21% . In the face of heavy upward pressure on inflation, the Bank of England seems to have no better choice than to continue raising interest rates.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange non-commercial position report shows that as of 2022-08-30 the week (hands) sterling long positions decreased by 306 contracts to 58,477 contracts; concerns about the UK economic outlook are expected to drag down the pound. The pound's recent fall may reflect investor concerns about headwinds facing the UK economy. GBP/USD posted its worst monthly performance in six years in August.

Foreign investors are selling British government bonds, causing the pound to weaken. Bank of England data showed that in July, foreign investors sold 16.5 billion pounds of British government bonds, the largest sale since July 2018. The underperformance of gilts against sterling swaps indicates growing concerns about gilts, either because of the Bank of England's quantitative tightening program or concerns about the fiscal policy of the next prime minister;

According to data released by the Office for National Statistics on August 12, according to initial estimates, in the second quarter of 2022, UK GDP contracted by 0.1% month-on-month. Specifically, in terms of output, services output fell by 0.4% in the second quarter of 2022. Output from production activities rose 0.5% in the second quarter of 2022, a slowdown from the 1.3% increase in the previous quarter, and output levels remained 1.2% below pre-pandemic levels. In addition, the UK's GDP fell by 0.6% in June.

The British Chamber of Commerce believes that the British economy is already in recession, and the British inflation rate is expected to reach 14% by the end of this year. That will put more pressure on Britain's new prime minister to act quickly to avoid economic catastrophe. The U.K. economy is expected to contract for two consecutive quarters after shrinking in the second quarter, and is expected to recover only slightly by 0.2% next year. The BCC blamed higher energy costs, lower household spending and real wages, as well as a weaker export outlook, a poor investment climate and weakening business confidence.

The UK is suffering from an energy supply woes. Affected by the conflict between Russia and Ukraine and the high temperature and dry weather in summer, the United Kingdom encountered energy supply difficulties this summer, the cost of power generation has risen sharply, and the electricity bills of the British people have risen steadily. In the case of rising energy prices, the inflation level of the United Kingdom has also risen, and it has become the first country among the major developed economies to break the double-digit inflation level.

In order to curb inflation, the Bank of England has continued to raise interest rates since December last year, but the high inflation in the UK has not been eased. More importantly, continued rate hikes will inevitably damage the recovery and growth of the UK economy, although the Bank of England does not seem to have any other options.

Investors are continuing to weigh broader themes, notably the threat of sluggish U.K. economic growth accompanied by high or stagnant inflation, as well as uncertainty around potential policy changes under a new cabinet. Truss could be named the next British prime minister on Monday.

Scott Corfe, head of research at the Social Market Foundation, a Westminster-based bipartisan think tank, said there was uncertainty around what could happen to the central bank in the future if Truss did become prime minister. , which may cause difficulties for investors. Investors like certainty. If for a considerable period of time what is the new mandate of the Bank of England, or the extent to which politicians may intervene in the future rate-setting process, it does create some uncertainty about the UK's future inflation and economic growth prospects sex. "

Fran Boait, executive director of British think tank Positive Money, agrees. The think tank works on systemic reform of the financial system. In an interview with the show on Aug. 25, Boit said it would be best for Truss to "articulate more on what she wants to achieve" in a possible licensing review.

GBP/USD daily candlestick chart shows:

The short-term decline has not stopped, and there is a trend of further downward movement. The top suppresses focus on the vicinity of 1.16747, the low-level support focuses on the vicinity of 1.13570, the MACD indicator is in the short-term area and continues to oscillate downward, and the RSI indicator is in the short-term area and remains weak and hovering. As shown in the figure:

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