• UK contracts faster than expected
• One-off factors largely behind the decline, BoE still expected to hike
• Major support being tested in cable

The UK economy contracted faster than Expected in July which is weighing on the pound this morning.

GDP fell 0.5%, much faster than the 0.2% contraction that was expected, but as has been the case throughout this year, one-off factors played a big role. Strikes and the weather were largely blamed for the steep decline although some are clearly worried that overall momentum in the economy remains weak.

I’m not sure the data will really sway the Bank of England at all next week. Not against the backdrop of such strong wage growth, as was reported yesterday. Markets are now pricing in a rate hike at around 75% which seems overly cautious to me but then, perhaps Bailey’s words last week are continuing to ring in the ears of traders.

The Governor and his colleagues indicated the discussion will be more balanced than people seem to think which suggested a hold is very much on the table this month. That seems a little far-fetched at this stage and I think the words are probably intended for a little further down the line in November but then it wouldn’t be the first time the BoE has surprised us. That said, it also wouldn’t be the first time they’ve hinted at something and not followed through.

A pivotal level for cable?

Cable has continued to drift lower after today’s GDP figures but there appears to be a little less vigor in the decline which may raise a few questions.

GBPUSD Daily

Source – OANDA on Trading View

Is the decline of the last couple of months running on fumes? If so, are we going to see a correction or has this been a correction in the broader uptrend?

The answer to the second question is that we’ll only know in time, should we see a big move higher from here. On the first question, there are signs that the sell-off is losing momentum. The drop today doesn’t appear to have been backed by moves lower on either the stochastic or the MACD.

That in itself doesn’t mean the pair is about to reverse higher. But that it occurs around the 200/233-day simple moving average band and the 50/61.8 Fibonacci retracement zone – March lows to July highs – may suggest it could be early signs of struggles which could continue if tested again.

A rotation off here would be interesting as it could signal that the sell-off since July has just been a bullish retracement. In that case, the 55/89-day Sma Band above could be very interesting.

A move below the 200/233-day SMA band and Fib levels could be a very bearish development, on the other hand, especially if back by momentum. And interesting one to watch over the coming days and weeks.