UK third-quarter GDP may have avoided contraction by narrowly beating expectations of a 0.1% fall, but the economy is still stagnating and thus leaves sterling vulnerable to further downside as it languishes around the weekly lows.

After paring the majority of the prior week’s corrective move higher, GBP/USD faces a slew of key UK data releases in the coming week – labour market report, CPI and retail sales – that will have a big influence on sterling’s fortunes as well as the Bank of England’s policy outlook.

Recent comments by the BoE’s Chief Economist, Huw Pill, who implicitly validated market pricing of rate cuts from the middle of next year, suggests that the bank’s dovish reaction function has re-emerged, even though he later said an extended period of persistently restrictive monetary policy.

For sterling, this likely raises asymmetrical downside risks, where soft UK data has a bigger influence than topside surprises.

On the technical front, the rejection of the 200DMA (1.2435) has emboldened bears and while GB/US rate differentials have narrowed a touch, they are not signaling a move to upside in the near term.
For now, the path of least resistance is skewed towards further weakness, with focus on the 1.21 handle.

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