GBP/USD has edged higher and is trading around the 1.25 line. Earlier today, GBP/USD touched a high of 1.2537, its highest level since June 6th.
UK GDP stalls
The UK economy flatlined in February, versus an upwardly revised 0.4% gain in January and the consensus estimate of 0.1%. Growth was a negligible 0.1% in the three months to the end of February, as the economy has stagnated. The drivers behind the lack of growth are widespread strikes and inflation, which remains stubbornly high. How bad is the outlook for the UK economy? An IMF forecast released this week has projected that growth will contract by 0.3% in 2023, making it the worst performer in the G-20, which includes Russia.
The country has been hit by a wave of large-scale strikes in the public sector, as workers have seen real income fall due to red-hot inflation. The strikes, which show no signs of letting up, resulted in business activity and manufacturing contracting in February and further labour unrest will continue to hamper economic growth.
Inflation isn’t showing any signs of peaking, and rose in February to 10.4%, up from 10.1% in January. The Bank of England may have designated inflation as public enemy number one, but raising interest rates to 4.25% has failed to curb inflation. UK Finance Minister Hunt has pledged to slice inflation in half and says a recession can be avoided, but Hunt’s optimism is hard to share given the grim economic landscape in the UK.
US PPI drops sharply
In the US, inflation at the wholesale level fell sharply in March. Headline PPI dropped to 2.7% y/y, down sharply from an upwardly revised 4.9% a month earlier and below the estimate of 3.0%. The core rate eased to 3.4% y/y, down from 4.8% in February and matching the forecast. On a monthly basis, headline PPI dropped by 0.5% and the core rate by 0.1%.
The positive PPI data comes on the heels of the consumer inflation report, which was mixed, as headline CPI fell from 5.9% to 5.0%, while the core rate nudged up to 5.6%, up from 5.5%. Inflation has been decelerating, but the markets still expect a rate hike in May, with a 65% probability of a 25-bp increase, according to the CME Group.
- GBP/USD touched resistance at 1.2537 earlier. The next resistance line is 1.2656
- There is support at 1.2405 and 1.2282