GBP to USD Forecast: The UK Economy Avoided a Contraction in the Third Quarter

Highlights

• The GBP/USD declined by 0.50% on Thursday, ending the session at $1.22226.
• On Friday, the Third Quarter UK GDP Report beat expectations.
• Later in the Friday session, Fed speeches and US consumer sentiment will be focal points.

The Thursday GBP/USD Overview

On Thursday, the GBP/USD fell by 0.50%. Following a 0.13% decline on Wednesday, the GBP/USD ended the day at $1.22226. The GBP/USD rose to a high of $1.23086 before falling to a low of $1.22125.

UK GDP Report Beats Expectations

On Friday, the heavily anticipated UK GDP Report garnered investor interest amid increasing recessionary fears.

The UK economy stalled in the third quarter after expanding by 0.2% in the second quarter. Economists forecast a 0.1% contraction. The UK economy expanded by 0.2% in September after growing by 0.1% in August. Economists forecast the economy to stall.

However, industrial and manufacturing production figures fell short of forecasts in September, signaling a weakening macroeconomic environment.

According to the Office for National Statistics,

• Service sector output declined by 0.1% in the third quarter, while output across the production sector was flat.
• Consumer-facing services contracted by 0.7%.
• Production output stalled in the third quarter after growing by 1.2% in the second quarter.
• Manufacturing production increased by a modest 0.1% after growth of 1.9% in the previous quarter.
• Improving trade terms offset declines in business investment, household spending, and government consumption.
• Household consumption declined by 0.4% in the third quarter after increasing by 0.5% in the previous quarter.

Service sector output and household consumption will be areas of concern. The UK services sector accounts for over 70% of the UK economy. Private consumption contributes over 60% to the UK economy.

The GDP Report signals a deteriorating economic environment. However, the pullback in household spending and service sector activity could offer the Bank of England relief. Downward trends in consumption and service sector activity could dampen demand-driven inflationary pressures.

In response to the GDP Report, the GBP/USD rose to a high of $1.22342 before falling to a low of $1.22170.

FOMC Member Speakers and Consumer Sentiment in Focus

On Friday, the preliminary Michigan Consumer Sentiment Report will garner investor interest. An unexpected upswing in consumer sentiment would support a more hawkish Fed interest rate trajectory.

Consumer confidence fuels consumer spending and demand-driven inflationary pressures. A pickup in demand-driven inflation would force the Fed to take a more hawkish rate path to curb spending. Higher rates raise borrowing costs and reduce disposable income, affecting consumer spending. A downward trend in consumer spending would dampen demand-driven inflation.

Economists forecast the Michigan Consumer Sentiment Index to decline from 63.8 to 63.7 in November. Investors must consider the Expectations and Inflation Expectation sub-components. Upward trends across the sub-components would drive demand for the US dollar.

However, investors must monitor Fed speakers. FOMC voting member Lorie Logan and non-voting member Raphael Bostic will speak. Hawkish comments aligned with Fed Chair Powell would impact the appetite for the GBP/USD.

Short-Term Forecast

GBP to USD Price Action

Daily Chart

The GBP/USD sat below the 50-day and 200-day EMAs, reaffirming bearish price signals.

A GBP/USD break above the 50-day EMA would support a move to the 200-day EMA and the $1.24410 resistance level.

The UK GDP Report, US Consumer Sentiment, and Fed speeches are focal points on Friday.

However, a fall through the $1.21216 support level would give the bears a run at $1.20500.

The 14-period daily RSI reading of 49.10 suggests a GBP/USD drop below the $1.21216 support level before entering oversold territory.

4-Hourly Chart

The GBP/USD remains below the 50-day and 200-day EMAs, sending bearish price signals.

A GBP/USD break above the EMAs would support a move toward the $1.24410 resistance level.

However, a drop below $1.22000 would bring the $1.21216 support level into play.

The 14-period RSI on the 4-hour Chart at 40.78 indicates a GBP/USD fall to the $1.21216 support level before entering oversold territory.