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The British economy is contracting for three consecutive quarters. The initial news of a big downfall in Q2 was later trimmed down from -0.7% to -0.4%.

There are some signs of improvement during Q3 – a preliminary report for this quarter will be published at the end of October and is likely to draw a lot of attention. The pound continues enjoying flows out of the euro-zone.

The strong spot in the British economy remains the services sector. With its continued growth, it partially compensates for all the rest. Manufacturing is slumping and hasn’t seen growth since April. Prices of homes, that were quite solid thanks to high demand in London, are on the fall again, alongside construction which isn’t really going anywhere.

So where does the hope come from?

  • A surprising drop in jobless claims: Claimant Count Change dropped for two consecutive months, beating expectations, big time and after seeing mixed results beforehand.
  • Trade deficit stabilized: after a few worrying months, Britain’s trade deficit narrowed down to 7.1 billion, within the normal figures seen beforehand.
  • Government borrowing a bit better: While the British government didn’t enjoy a second month of surplus, the deficit was better than predicted.
  • Retail sales stabilized: Also here, the volume of sales dropped, but only by 0.2%.

It’s important to stress that the UK isn’t doing well, just not as bad as in Q2, and that’s already something.

The Bank of England isn’t expected to act during this month. Speculation about rate cuts came to an end when Mervyn King ruled that out. This can return to the agenda only if inflation gets too close to the 1% target, but at current levels, this doesn’t seem likely.

Another round of QE cannot be ruled out until the end of the year, but not at this moment, as there is some hope of stabilization.

This article is part of the October monthly forex outlook. You can download the full report, including the currency technical outlooks and the relative strength index by joining the newsletter in the form below.

Further reading: GBP/USD Forecast.