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09.08.201910:47 Forex Analysis & Reviews: GBP/USD slides after UK GDP contraction, sell on rallies

According to the first reading, second-quarter GDP contracted 0.2% following 0.5% growth in the first quarter. The reading was also below consensus forecasts of 0.0%. Year-on-year growth also slowed to 1.2% from 1.8% and below expectations of 1.4%. This was the first quarterly contraction since 2012.

Monthly industrial production declined marginally by 0.1% for June with an annual decline of 0.6% while manufacturing output dropped 1.4% over the year.

Business investment worsened for the quarter while a construction output fell in June. The only bright spot was a sharp narrowing of the trade deficit for June.

Markets expected a weak figure for the second quarter, but contraction of 0.2% will further erode market sentiment towards the economy.

In an immediate response, GBP/USD dipped just below 1.2100 not far from 34-month lows with EUR/GBP approaching 0.9250.

Political uncertainty is denting sterling's confidence with a strong market focus on the October 31^st Brexit deadline.

Foreign Minister Raab reiterated that the UK would leave the EU on WTO terms if the EU refused to show flexibility on re-negotiation.

Market participants are speculating that if the government lost a no-confidence vote it would call for a General Election just after October 31^st in order to secure a 'no-deal' Brexit while the parliament was not sitting.

Opposition parties continue their attempts to block such a policy and political tensions will intensify. Unless there is evidence of the UK or EU governments back-tracking and offering compromises, the sterling will remain vulnerable on political grounds.

A soft dollar tone will provide an element of GBP/USD protection and selling offers little immediate value, especially with a weak reading priced in, but there will be further selling interest on rallies.

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Tim Clayton,
Analytical expert of InstaSpot
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