UK GDP has grown, emphasizing the UK fundamental economic strength that has made it one of the best-performed economy this year. Along with it, GBPUSD moved up.

Camouflaged under stronger USD and worldwide economic decline, Poundsterling weakened more than 4% against US Dollar in the last three months despite of UK solid economy. However, UK Office for National Statistic (ONS) yesterday (30/9) reported that UK GDP has grown 3.2% (yoy) in the third quarter of 2014, or 0.9% quarter to quarter. The news emphasized UK fundamental economy strength that has made it one of the best performed economy this year.

Poundsterling
Main risk for Poundsterling this year stemmed from two points, that is from the possibility of Scotland independence following referendum in September and on market expectation for the BOE to hike benchmark interest rates as UK economy become stronger. Now that speculation related to Scotland independence has died down, Pounds should have recovered. It was dragged down by USD strength that has felled other currencies across the boards. But, could it be that it has touched its lowest yet, and have started to go upward?

 

UK GDP In Line With Expectation

One reason why latest GDP Report from the UK failed to push GBP significantly upward is that it is in line with expectation. As the market have anticipated the improvement, market reaction is muted. Nevertheless, the latest stat means that UK GDP has grown consistently higher since first quarter of 2013. This year, UK actually outperforms Uncle Sam.

USA Comparison of the Great Britain and United States GDP Annual Growth Rate

On the downside, current account deficit and high debt-to-GDP ratio threaten the sustainability of UK economic growth. Additionally, UK latest account of GDP was established in accordance with ONS new GDP calculation method that includes the controversial factor of drug and prostitution. Conclusively, we could say that UK economy for the next three months remains good, although it might change in the longer term.

 

Improved UK Job Market

UK unemployment rate has dropped to its lowest in post-crisis era. It has dropped to 6.2% in the second quarter of 2014 and is forecasted to improve to 6.1% in the third quarter. The figures point to the trend of declined unemployment across developed countries, not unlike the US.

USA Comparison of the Great Britain and the United States Unemployment Rate

Also similar to the US is the way wages remain unchanged, even though inflation has picked up. The circumstances present a dilemma for central bank in changing its current low rate policy. If rate is hiked, then the job market could be stressed and companies might refuse to hire again. Therefore, the Bank of England, just as US The Fed, stipulated that rate hike will only be possible if wages have improved in accordance with other indicators.

 

Strong Poundsterling Hinge On BOE Rate Hike

Despite of recent drawback, the Pound is actually quite strong against the US Dollar. It could be seen from comparison of GBPUSD performance with other major pairs. On the graph below, GBPUSD (green lines) have performed better than its counterparts this year. Poundsterling rose around 6% against US Dollar before dropped in July along with the Euro, Swiss Franc, and the Yen. However, Euro and Swiss Franc have signalled weakening even before July and Japanese Yen is under long-term bearish trend, while the Pounds were bullish.

GBPUSDCurrency Performance Chart

The bullish Pound was cut short by talk of sooner US The Fed rate hike, which might prove to be fruitless in the next few weeks. On the other hand, several analyst have predicted that BOE rate hike might come sooner than the Fed's, with Barclays expected it to be started in November 2014. The sentiment boosts Poundsterling outlook. Latest movements of GBPUSD signal that Poundsterling have pulled back, although downward pressures remain.

GBPUSDGBPUSD In H4 Chart With EMA-200 (magenta), EMA-60 (blue), EMA-20 (red), Fibonacci Retracement, and MACD

Support level 1,60507 is an important point to note. We are quite confident that GBPUSD will leave that level behind in the foreseeable future. However, whether it will be this year's lowest point or superseded by lower support will depend on UK economic strength and BOE rate hike projections. There are many homeworks that the BOE and UK Governments need to do to sustain the current economic improvement.

Latest UK Manufacturing PMI released a few moments ago recorded lowest PMI index in 17 months, down from 52.2 to 51.6, as UK manufacturing sectors receive side impact of Eurozone deteriorated economy. This is a continuation of August Manufacturing PMI slowdown, and at this point might spread to other sectors. In the next few days, investors will monitor the development of UK broader industry statistic, including services, in order to speculate on the Bank of England next course of action.