GBP/USD retreats as worrying GDP data and Brexit fears dampen mood

The GBP/USD pair declined slightly in the morning session as investors reacted to the weak economic data from the UK. Traders are also focusing on the rising chances of a no deal Brexit and the overall strong US dollar.

UK economy collapsed in April

The GBP/USD pair declined after the Office of National Statistics (ONS) released catastrophic economic data. The numbers showed that the UK economy contracted by 20.4% in April as the country enforced the coronavirus lockdown. This number was significantly higher than the March decline of 5.8% and the median estimate of 18.7%.

In the three months to April, the economy contracted by 10.4%, which was higher than the expected decline of 10%. According to the statistics office, all sectors of the economy contracted during this period.

The accommodation and food services sector was the worst-affected as most hotels and restaurants stayed out of business. It declined by 40.9%. It was followed by other services, which contracted by 20.5% and education which eased by 18.8%. In all, the index of services declined by 9.9% while the index of production declined by 9.5%.

Meanwhile, the data showed that industrial production in April collapsed by 20.3% from March and by 28.5% on a year on year basis. Analysts were expecting the two to decline by 15.0% and 19.9% respectively.

The manufacturing sector too was not at ease. The sector declined by 24.3% from March and by 28.5% on an annualised basis. Analysts polled by Bloomberg were expecting the data to show a contraction of 15.8% and 19.9% respectively.

The GBP/USD pair also reacted to the weak construction output data. The numbers from ONS showed that construction output contracted by 43.6% in April and by 44% on an annualised basis. According to Blomberg, analysts were expecting the data to show a contraction of 36.2% and 25.0% respectively.

As the UK remained in shutdown, the volume of trade weakened. The country’s trade deficit expanded by £3.2 billion to £1.2 billion in the three months to April. In this period, exports declined by £13.7 billion while imports fell by £11.8 billion.

Brexit concerns remain

The GBP/USD pair is also reacting to the rising risks of a hard Brexit. This is after David Frost, the chief UK negotiator, said that the UK was committed to end the transition period on December 31^st. Since the fourth round of talks ended without a deal, it means that the likelihood of a hard Brexit are high. On a positive side, Boris Johnson will hold virtual talks with Ursula von der Leyen on Monday as they try to reach an agreement on key issues.

I am also retweeting the message I posted in April on the Government's policy on the transition period, which remains valid. https://t.co/6hSwldWWl2

— David Frost (@DavidGHFrost) June 11, 2020

A no-deal Brexit will be more disastrous for the UK than for the eurozone. This is because the UK exports slightly below 50% of its goods to the eurozone. On the other hand, the larger block exports about 4% of their goods to the UK. In addition, a government report released last year showed that the UK would shed about 6.7% of the country’s GDP. Other estimates point at a worse situation.

A hard Brexit will happen at the worst possible time for the UK economy. In a report yesterday, Nissan said that it would shed about 250 jobs at a plant in Sunderland. This came on the same day that other big UK employers warned about more job cuts. These include Centrica, which said it would cut 5,000 jobs, and Johnson Matthey, which said it would cut 2,500 jobs. A report by the FT said that more than 100,000 jobs at key UK companies were at risk. In a statement, Stephen Phipson said:



“We have sight of a lot of redundancy programmes across manufacturers. Over the next few weeks we’ll sadly see a lot more job losses coming. The job retention scheme may have simply deferred the job losses, not prevented them.”

GBP/USD technical outlook

On the daily chart, the GBP/USD pair is slightly below the important support at 1.2645 and is slightly above the 100-day and 50-day exponential moving average. The pair also formed a bearish evening star pattern on Wednesday, which means that the pair may continue falling as bears target 1.2400.