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Will the UK avoid falling into a technical recession?

London skyline with Gherkin near the front

Yesterday saw another positive day for the FTSE100 as well as a new record high, with the 8,000-level continuing to act as a magnet for investor sentiment, and a market that seems to just want to go higher.

It was also a positive day for other markets in Europe which saw the Stoxx600 return to the same levels it was trading at prior to the Russian invasion of Ukraine.

Markets in the US on the other hand appear to be finding it more difficult to hold onto these recent higher levels, despite opening higher they gradually rolled over into the close to finish lower for the second day in a row as US yields continued to move higher.

The US 2-year yield which fell to 4 months low just prior to last week’s payrolls report, yesterday pushed above 4.5% for the first time this year, signalling a sharp change in sentiment when it comes to future US interest rate expectations. This time last week the market was pricing in rate cuts by the end of this year, and a fed funds terminal rate below 5%. Since then, we’ve seen a significant repricing of that with a succession of Fed speakers pointing to rates remaining higher for months to come.

Consequently, we could well see European markets open modestly lower this morning, with the main focus today set to be on whether the UK economy can avoid falling into the technical recession that the Bank of England and the OBR say we are already in.

Having seen the UK economy contract in Q3 to the tune of -0.3% there had been a widespread expectation that today’s Q4 numbers would see a similar contraction, officially putting the UK economy into recession.

A lot of the reason for that Q3 contraction was a collapse in economic activity in September due to the funeral of Queen Elizabeth II.

This slowdown saw a big rebound in October which saw a monthly expansion of 0.5% and was then followed by a 0.1% expansion in November which confounded expectations of a -0.1% decline.

The better-than-expected performance was helped by a resilient services sector, because of the Qatar World Cup, which saw decent performances from pubs and bars, as people went out and supported England.

Industrial and manufacturing production was disappointing in November and is expected to be equally so in December as well with contractions of -0.2% for both.

Tour operators and reservation services were positive contributors to November GDP with gains of 3.7% as people booked holidays for next year. Working on the rather unscientific basis that the World Cup ended on 18th December, and England went out on the 10th there is the prospect that we might have avoided a Q4 contraction and thus avoided the “R” word, even when taking into account the disruptive nature of the strike action which disrupted peoples travel and shopping plans.

Recent retail updates have offered encouragement that consumers are still spending, albeit more cautiously. According to the OBR and the Bank of England the UK economy is already in recession, however as is often the case, could they both be wrong?

Whatever the outcome of today’s GDP numbers it’s likely to be a close-run thing, but with the September decline of -0.8% set to drop out of the rolling 3-month numbers the UK might avoid a technical recession, depending on how the economy performs in December, with monthly GDP expected to contract by -0.3%.

Whatever the outcome of today’s numbers the nuance is likely to be lost on a lot of people given how finances are coming under strain. What we do know is that any growth is likely to be anaemic, and 2023 is still likely to be very challenging. 

EUR/USD – pushed up the 1.0790 area yesterday before sliding back. The 50-day SMA at 1.0690 is still key support with a break below 1.0670 targeting 1.0580. Above the 1.0780 targets 1.0820.

GBP/USD – pushed up to the 1.2190 area yesterday and the 50-day SMA, before slipping back. Need to break above that to retarget 1.2300. We have support at the 200-day SMA at 1.1970 which has so far kept a floor under recent falls. Below 1.1960 retargets the 1.1835 area.

EUR/GBP –slipped down to the 0.8840 area and has rebounded modestly. If we stay below 0.8880 we could see a return to the 0.8820 level.

USD/JPY – the 50-day SMA at 132.60 continues to cap the US dollar’s advance. While below the 50-day SMA the bias is for a move back to the recent lows near 128.00, on a break below support at 130.40. 


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