GBP/USD Collapses on Squeezing Economy

GDP contracted by 0.5% in the fourth quarter of 2010. This was a shocker, as a growth of the same scale was expected. GBP/USD got a big blow from this figure and dropped sharply.

In Q2, the British economy grew by 1.1% and an OK growth rate was seen in Q3 as well – 0.7% (After revisions). This release erases most of the growth in Q3. There were expectations for a weaker growth rate in Q4, but there weren’t expectations for contraction.

While this is only the first release and it will be followed by two revisions, the terrible figure means that even if we are optimistic and expect upwards revisions, growth is highly unlikely to be seen. Such optimism isn’t realistic.

GBP/USD already slid down before the release, just above 1.59. There were probably rumors. And after the publication, GBP/USD is falling to 1.58, and the move continues.

Support at 1.5820 is broken at the time of writing. Further support appears at 1.5720. Both lines are minor. Significant support appears only at 1.5650. Above, 1.5910 is minor resistance, followed y the important 1.60 lines.

See more lines, analysis and events in the GBP USD forecast.

Last week, it seemed that a rate hike is inevitable as CPI reached an annual level of 3.7%. But as written also here, the economic situation in Britain isn’t too good. I remained bearish on cable.

Now the central bank’s dilemma is even more complicated – another quarter of contraction and we have a double dip recession. But leaving the interest rate so low means that inflation can rage. Troubled times.