The two significant events this week that will move the pound are the employment numbers and GDP figures. The job numbers have already been released and contributed to a weaker sterling. Since then, there have been significant political developments that have also impacted the currency. Now, traders are looking forward to the GDP numbers to see if the trend will be affirmed or if there will be support for the pound.
The BOE’s razor-thin majority vote to cut rates last week has already inclined the odds towards another cut at the December meeting. However, what could further put downward pressure on the pound are signs that the BOE will continue to cut rates throughout the course of next year. And that could come from the upcoming GDP figures, in combination to the labour data that was released on Tuesday.
Record Highs Mean Further Weakening
It’s interesting to note that the FTSE 100, the premier stock index in London, reached a record high on Tuesday following the release of the jobs figures. Typically, the currency moves in opposition to the stock market, so the FTSE poised for further growth could mean that the pound will be weaker going forward.
On Tuesday, the UK unemployment rate rose to 5.0%, higher than the 4.9% that had been anticipated. Meanwhile, the number of employees in Britain fell by 32K in September. Yields in the gilts dropped across the curve in reaction, a sign that the market now believed that the BOE is poised to ease rates for a longer period.
Bigger Cuts Or More Cuts?
It’s not just how big the next rate cut is that affects the currency, but how low the terminal rate is. Typically, investors seeking to capitalize on fluctuating interest rates invest in two-year bonds. This means that what the central bank does over a two-year horizon is relevant to currency flows.
Lack in the labour market means that inflationary pressures are likely to ease. And the BOE will probably try to get ahead of that by cutting rates. It takes several months to turn a country’s economy around, meaning that the BOE could be in easing mode for longer if the unemployment rate continues to rise. Under those conditions, the pound could continue to weaken.
How Will UK Q3 GDP Affect the GBPUSD?
The sluggish UK economy is prompting the BOE to consider further easing. It’s also making investors nervous that the government will not have enough revenue, and will be forced to raise taxes in the Autumn budget. Both of those weaken the pound. But if the GDP number were to surprise substantially to the upside, then the BOE might be less inclined to ease. And investors could get a little more confident in the UK economy, and resume buying pound-denominated assets. That could provide a double effect to support sterling. On the other hand, if the economy continues to be sluggish, the pound may remain weak.
UK Q3 GDP is expected to have grown at a 0.3% pace, matching the level of Q2. This would be a departure from the trend, as the average of the first two months of the quarter is nil. Monthly GDP for September is expected to be 0.1%, the same as in August.
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