Downside Risks For GBP

With mounting fears over the second wave of COVID in the UK, as well as the prospect of the UK leaving EU trade talks without a deal, the outlook for GBP is looking murkier by the day. The latest UK economic data, released today, has done little to assuage these concerns.

The Office for National Statistics reported today that GDP grew by just 2.1% in August. This marks a dramatic decline from the 6.6% reading seen in July and reflects a significant loss of momentum in the economy. The figure is especially disappointing given the Chancellor of the Exchequer’s “Eat Out to Help Out Scheme” over August, which was aimed at boosting revenues for hospitality venues.

GDP Down 9.2% From Pre-Pandemic Peak

The August reading was well below the 4.6% estimated by analysts ahead of the release and means that GDP remains 9.2% below the peak in February. Looking at individual sectors, the services sector was among the worst affected, remaining 9.6% below its pre-pandemic peak. Constructions is sitting 10.8% down from pre-pandemic highs while agriculture and manufacturing are down 4.3% and 8.5% respectively.

Commenting on the data, Jonathan Athow, Deputy national statistician for the ONS said: "The economy continued to recover in August but by less than in recent months.

"There was strong growth in restaurants and accommodation due to the easing of lockdown rules, the Eat Out to Help Out scheme, and people choosing summer staycations. However, many other parts of the service sector recorded muted growth.

Lockdown Fears Growing

The loss of momentum in economic activity likely reflects the various local lockdowns which came into play over the month. The data is particularly worrying given the rising prospect of further lockdowns over coming months. The government has touted plans for a three-tier lockdown alert system which would involve two-week “circuit breaker” lockdowns where all hospitality venues are closed which would have a strong, negative impact on GDP.

The ONS also expressed concern over the impact of the end of the government’s furlough scheme saying: "The furlough scheme comes to an end this month and there is a real danger that fear of unemployment triggers a negative feedback loop of precautionary saving and dampens consumer confidence. Covid-19 cases are rising quickly in some parts of the country, with further localised lockdowns expected to be announced on Monday. This will undoubtedly hit output as the country braces itself for a long, difficult winter.”

Technical Views

GBPUSD (Bullish above 1.2649)

From a technical viewpoint. Following the breakdown through the bullish channel from year to date lows, GBPUSD found support into the 1.2649 region and has since bounced back. Price is now testing the long-term bearish trend line once again. Should price break above here the next levels to watch will be the 1.3191 and 1.3516 levels. To the downside, any break of 1.2649 will open up a test of support at the 1.2238 level.

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