Sterling slips as data confirms UK recession

Official data confirms UK recession, dealing blow to PM Rishi Sunak in election year

On Thursday, the British pound saw a minor decline following the release of data indicating that the UK economy had slipped into a recession at the close of 2023, causing investors to heighten their expectations for potential interest rate reductions by the Bank of England within the year.

The news will provide for a tough backdrop ahead of this year’s expected election for incumbent Prime Minister Rishi Sunak, who had previously promised to boost growth in the UK.

Sterling dipped slightly against the dollar, with the GBP to USD pair trading at $1.2545 — a small drop from $1.268 just prior to the announcement of the economic data.

In contrast, the euro saw a 0.33% increase against the pound, with the EUR to GBP rate hitting 85.66 pence and moving further from its six-month low of 84.98 pence recorded on Tuesday.

Official figures revealed that the UK's GDP fell by 0.3% in the quarter ending December, entering a technical recession in the latter half of 2023 after contracting by 0.1% between July and September, according to the UK’s Office for National Statistics (ONS).

This 0.3% contraction was worse than the 0.1% decrease anticipated by economists surveyed by Reuters. Sanjay Raja, Deutsche Bank's chief UK economist, commented on the data release to the news agency:

"While the Bank of England’s focus will likely remain on price data, the bigger drop in output and the politics of being in a technical recession will no doubt become uncomfortable”.

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UK interest rate cut bets up after GBP data

Market anticipations for rate cuts by the Bank of England fluctuated throughout the week. Data from Tuesday indicated a less significant slowdown in wage growth towards the year's end, whereas Wednesday's statistics showed that UK inflation remained stable at 4% in January, defying predictions of an increase.

After the UK GDP data release on Thursday, market expectations leaned towards approximately 73 basis points in rate cuts from the Bank of England for the year — a marked jump from 60 basis points on Tuesday, influenced also by strong inflation data from the U.S., which fueled speculations that central banks might delay rate cuts. However, this expectation has significantly decreased from around 130 basis points at the year's start.

GBP forecast: Bank of America sees GBP/USD reach $1.27 by year-end

Despite sterling’s downturn on Thursday, Bank of America revised its forecast upwards, suggesting the pound could reach $1.37 by year-end — an adjustment from its former prediction of $1.31.

Kamal Sharma, a FX strategist at Bank of America, attributed this optimistic outlook to "elevated services inflation and tight labor markets," which he believes will maintain comparatively high interest rates in the UK, bolstering the pound's value.

Pound forecast: Danske Bank says near-term support for GBP set to fade

In a comment after the UK GDP data release on Thursday, economists at Danske Bank outlined their EUR/GBP forecast:

“Over the past month, EUR/GBP has continued its move lower on the back of primarily a sharp BoE repricing. This could continue to lend support in the near term.

At present, we do not see the global investment environment to create meaningful divergence between EUR and GBP. However, we expect the UK economy to perform relatively worse than the euro area and expect relative growth outlooks and broad central bank pricing to weigh on GBP.

We target the cross at 0.8800 in 6-12M".

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