UK Economy: Deficit Shrinks, Housing Stabilizes

In British economic developments, December's budget deficit came in smaller than anticipated, potentially creating space for tax cuts in the upcoming March budget. However, the largest decline in retail sales in almost three years during the same month raised concerns about a possible late 2023 recession. The risk of recession holds significant political implications for Prime Minister Rishi Sunak, who faces an election year with the Conservative Party trailing in polls. Sunak and Finance Minister Jeremy Hunt have expressed interest in tax cuts as part of their budget strategy.

Contrary to economic uncertainties, London has retained its position as the world's leading financial center, surpassing New York, according to the City of London Corporation's survey. The report suggests that post-Brexit business disruptions and the impact of the COVID-19 pandemic have subsided, contributing to London's resilience and improved business environment.

The housing market in Britain exhibited signs of stabilization, with falling mortgage rates boosting demand and easing the market downturn. However, predictions regarding the Bank of England's (BoE) future actions remain divided, with a Reuters poll indicating uncertainty about whether the BoE will trim borrowing costs in the next quarter or later in July-September. Despite a recent rise in inflation to 4%, expectations are for it to decline to 2% in the coming months, allowing room for potential interest rate cuts.

The BoE's cautious approach to rate cuts is influenced by several factors. The UK's economy is showing modest signs of improvement, with energy tariffs and mortgage costs expected to decline. Finance Minister Jeremy Hunt is anticipated to announce tax cuts in the March 6 budget, coinciding with the upcoming election in late 2024.

To caution investors who may be overly optimistic about rate cuts, the BoE might convey a message next week by revising its inflation forecasts for two to three years ahead, aligning them with current market pricing. If this adjustment is realized, the BoE's actions would coincide with similar moves by the U.S. Federal Reserve and the European Central Bank.

Anticipated inflation trends depict a drop below the target to 1.9% in the next quarter, with a sustained level around that mark until at least mid-2025. This scenario provides the central bank with the flexibility to initiate a gradual easing of policy, aiming to alleviate the financial burden on indebted consumers.

Meanwhile, the dollar strengthened against other currencies, reaching six-week highs, fueled by investor confidence in the Federal Reserve's reluctance to hasten interest rate cuts amid a stable U.S. economy. While the U.S. rate futures market indicates a 47% chance of a March rate cut, down from 80% two weeks prior, traders are still betting on five rate cuts in 2024, reflecting the ongoing uncertainties in global economic dynamics. Consequently, in the short term, the GBP/USD currency pair may exhibit fluctuations, moving both upward and downward across a broad range.

Data for Technical Analysis (5H) CFD GBP/USD

Resistance : 1.2698, 1.2703, 1.2711

Support : 1.2682, 1.2677, 1.2669    

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.2672 - 1.2682 is touched, but the support at 1.2682 cannot be broken, the TP may be set around 1.2703 and the SL around 1.2667, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2698 - 1.2708, TP may be set around 1.2724 and SL around 1.2677, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2698 - 1.2708 is touched, but the resistance 1.2698 cannot be broken, the TP may be set around 1.2682 and the SL around 1.2713, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2672 - 1.2682, TP may be set around 1.2661 and SL around 1.2703, or up to the risk appetite.       

Pivot Points Jan 24, 2024 01:49AM GMT