Can UK data provide relief to the battered British pound?

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The pound fell victim to the stock market turmoil caused by the conflict in Ukraine, plunging more than 3.5% since late February, when tensions with Russia began to escalate rapidly. Investors still expect the Bank of England to continue most of its planned rate hikes this year, but that will likely come at the expense of growth. Can the series of economic indicators out of the UK on Friday (07:00 GMT) shed some positive light on the outlook?

Go from crisis to crisis

Barely recovered from the crisis caused by the pandemic, the British economy is facing a new crisis. The war in Ukraine has deepened Europe’s energy crisis, fueling soaring oil and gas prices. But sadly, the ripple effects go beyond the energy sector, as commodity prices for everything from food to base metals soar as Western sanctions on material-rich Russia raw, begin to bite the rest of the world.

Although Britain is nowhere near as dependent on Russia for its energy needs as many eurozone countries, fuel prices in the UK are expected to skyrocket soon, adding to the pressure on consumers, who will also be affected by higher national insurance contributions from April. So far, neither the government nor the Bank of England have indicated they are about to change their policy.

Is the hawkish BoE adding to the pound’s woes?

This may be why the pound has plunged so much as investors believe the BoE is heading for a policy error in tightening at a time when growth prospects are rapidly deteriorating. Unlike the European Central Bank, which has signaled that it is prepared to ignore the spike in energy prices that is driven by factors beyond its control, the BoE will likely only pause its rate hike cycle. when growth begins to slow significantly.

While it is true that the UK economy is somewhat more robust than that of the Eurozone at the moment, it is unlikely to be as resilient as America’s during this crisis. Nonetheless, the latest economic pointers due on Friday could help ease some of the concerns if they show 2022 is off to a good start.

Modest GDP rebound expected for January

GDP is expected to have rebounded 0.2% month-on-month in January after contracting by the same amount in December when the Omicron restrictions were introduced. Such a figure would push annual growth up from 6.0% to 9.3%.

Industrial production, on the other hand, is expected to have risen by a meager 0.1% m/m in January, driven mainly by the manufacturing sector, which is expected to have increased by 0.2%.

Other figures to be released will include the trade balance and construction output for the same period.

Pound’s fate linked to the war in Ukraine

It’s hard to see the data having much of an impact on cable when tensions over Ukraine remain so high. At best, stronger-than-expected numbers could provide much-needed support. In this case, the 123.6% Fibonacci extension of the December-January rise could be a crucial defense to stop further declines just above the $1.30-$1.3027 level.

Should this support fail, the 138.2% and 161.8% Fibonacci extensions at $1.2942 and $1.2805, respectively, would then come into focus.

However, in case there is progress in the upcoming talks between the Ukrainian and Russian foreign ministers on Thursday, the pound would be poised for a decent bounce, potentially recovering towards the $1.3165 zone at first. , before testing the $1.33 handle.

Overall, however, the British Pound is likely to remain bearish as long as it trades below its long-term descending trend line, although no rate hikes from the BoE should alter this outlook as long as the war is on. rabies in Eastern Europe.

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