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U.K. GDP Meets Expectations, Business Investment Slumps
In similar fashion to the United States, U.K. business confidence is tumbling despite the second estimate
of quarter over quarter GDP meeting expectations of 0.70% expansion. In the U.S., the recent dip in
business confidence to the lowest level since the depths of the financial crisis has also dragged on
consumer confidence. CB consumer confidence printed the biggest miss of expectations since 2010 after
last month’s massive outperformance. However, despite all the negative data points, the U.K. remains one
of the top-performing G7 nations and the recent trickle higher in inflation might be helping that case. One
thing is for certain, investor confidence is slumping as sovereign bonds are in demand with U.S. 30-Year
treasuries slipping back under 3.00% yields yesterday.
Due to the unfortunate nature of the U.K. hitching its economic fortunes to Europe for the last few
decades, the protracted slowdown across the English Channel is going to continue to impact the outlook
for the British economy. The warning signs are all there and with the Bank of England chiming in
through mouthpiece Mark Carney, it seems that the U.K.’s fate lies very much in Mario Draghi’s hands as
he tries to steer the Eurozone away from another crisis. In the grand scheme of things, the U.K. economy
has been resilient to global downturns, but now with the sovereign crisis spreading to core states like
Germany, France, Italy and Spain, the party might be over. Germany which is the powerhouse behind the
support of the ailing Eurozone is starting to slip into recessionary territory and sanctions against Russia
are not helping the export behemoth. Any further downside in European fundamentals is likely to have a
more resounding effect on the U.K. versus the U.S. which does not depend as much on the Eurozone.
Looking at the chart of GBPUSD, since forming and confirming a double bottom on November 19th, the
pair has steadily trended higher, bound by the uptrend line started on the 19th. The upper bound for the
pair is 1.5737 which has been tested 3 times so far and proven a firm resistance level. The consolidation
of GBPUSD between the two lines is forming an ascending triangle pattern, with a bullish bias.
Considering the recent weakness in the pair which is ebbing near the lowest levels of 2014, there is a high
probability of a near-term technical pullback despite the outperformance of U.S. macroeconomic data.
However, recent data has pointed to contagion from the global economy as consumer and business
confidence both tumble. As the GBPUSD range narrows, the upcoming durable goods orders data out
this afternoon could have an impact on the pair and be the impetus for a breakout. If low volumes persist
and momentum is not a factor, the breakout will come to a head between December 1st and 2nd. Using
the uptrend line as an entry point is desired to get the best reward on an upside breakout, with the
resistance line serving as an exit point if the pair fails to break higher.
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