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UK Economy Remains Under Serious Pressure

1/4/2023 11:55 AM

The pound is trading in different directions, trying to recover from the active decline the day before. At the moment, the GBP/USD pair is holding near the local lows of November 23, making new attempts to test the resistance level of 1.2000 for a breakout.

There are no noticeable drivers for the growth of the US currency at the beginning of the week, and the increase in demand is largely due to speculative sentiment regarding further tightening of monetary policy by the US Federal Reserve. In turn, the pound was supported by data on business activity in the UK, presented the day before. S&P Global/CIPS Manufacturing PMI in December corrected from 44.7 points to 45.3 points, which turned out to be better than analysts' neutral forecasts.

At the same time, the UK economy is facing unprecedented domestic challenges, including high inflation, a cost of living crisis, as well as a record influx of migrants (45.756 thousand people crossed the English Channel last year) and growing dissatisfaction with working conditions among public sector workers. In particular, the British Railway, Maritime and Transport Union (RMT) reports that about 40.0 thousand railway employees are already participating in the five-day action, which is taking place this week, demanding wage increases and the cancellation of management decisions to reduce staff. For this reason, about 62.0 thousand trains may be canceled, which will make it much more difficult for the British to travel around the country after the Christmas holidays. In his New Year's address, Prime Minister Rishi Sunak said his government will put the needs of the population first this year and will make every effort to resolve the crisis.

As representatives of the Bank of England have repeatedly noted, the UK economy is facing a recession in 2023, which may turn out to be worse than in other G7 countries. The situation is complicated by a possible political crisis, since after the unsuccessful premiership of Liz Truss, discontent remains in society and the level of skepticism towards the new government is growing. The recovery of the UK economy is also accompanied by the adoption of a number of highly unpopular measures in the form of an increase in the fiscal burden on households.

On the daily chart, Bollinger Bands are declining rather actively: the price range is narrowing from above, reflecting the emergence of multidirectional trading dynamics in the nearest time intervals. MACD is below the signal line, at the moment the indicator is testing the zero level for a breakdown. Stochastic, having interrupted its active growth, formed last week, is reversing into a downward plane, signaling in favor of a further decline in the instrument in the ultra-short term.

Resistance levels: 1.2027, 1.2084, 1.2150, 1.2240. | Support levels: 1.1900, 1.1800, 1.1700, 1.1600.

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