GBP/USD in tight range as UK records worst contraction on record

GBP/USD in tight range as UK records worst contraction on record
Written by:
Crispus Nyaga
12th August, 07:23
Updated: 12th August, 07:24
  • The GBP/USD pair is in little changed as investors react to the UK GDP data.
  • According to the ONS, the economy contracted by a record 20.4% in the second quarter.
  • However, recent data such as industrial and manufacturing production show that the economy is recovering.

The GBP/USD pair is in tight range even after the Office of National Statistics (ONS) released weak economic data from the UK. The pair is trading at 1.3050, which is slightly below this month’s high of 1.3200.

GBP/USD
GBP/USD wavers after GDP data

UK economy had worst contraction ever

The UK has been affected significantly by the coronavirus pandemic. According to Worldometer, the country has recorded more than 312,780 cases and more than 46K deaths. This makes it among the worst-affected countries in the world.

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A number has now been put to the economic damage. According to the Office of National Statistics (ONS), the economy contracted by a record 20.4%, making it the second consecutive quarters of decline. It fell by 2.2% in the first quarter. This decline was slightly better than the 20.5% decline that analysts polled by Reuters were expecting. The economy declined by 21.7% on an annualised basis.

The contraction of the UK economy was mostly because of a sharp decline in private consumption, which declined by 23.1%. This consumption accounted for more than 70% decline of the economy. Also, business investments declined by more than 30% in the quarter.

Although the decline was severe, it was better than that of the United States. According to the Bureau of Economic Analysis, the US economy contracted by more than 32.9% in the second quarter. Another data by Eurostat showed that the Eurozone economy contracted by more than 40% in the quarter.

However, data from ONS showed that business activity had started to pick up in the final month of the quarter. Construction output increased by 23.8% in June while manufacturing and industrial production rose by 11% and 9.3%, respectively. Still, this production was significantly lower than in the same month in 2019.

As the UK remained in lockdown, the country’s trade declined. As a result, the trade deficit widened to £5.12 billion.

The mixed economic numbers from the UK came a day after the ONS released the June employment numbers. The data showed that the unemployment rate remained unchanged at 3.9%.

GBP/USD technical outlook

GBP/USD
GBP/USD forecast

The weekly chart below shows that the GBP/USD has been in a downward trend for years. This is evidenced by the falling black trend line. This line connects the highest point on June 2015, April 2018, December 2019, and July this year. The price is slightly above the 50-day and 100-day exponential moving averages.

The RSI has also moved from the oversold level of 27 to the current 60. Therefore, a break above the descending trend line will mean that bulls have prevailed. This will send a signal that the price could test the next resistance at 1.4000.

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