12.05.202211:10 Forex Analysis & Reviews: What lies behind free-fall in GBP? UK GDP for Q1 2022

The pound sterling fell to new one-year lows in response to the UK GDP data. The British economy contracted in Q1 which comes as a matter of fact in the context of dismal consumer sentiment, weak consumer spending, and soaring inflation. A high cost of living made consumers slash expenses. This raises doubts about the Bank of England's agenda for furtherrate hikes. Such doubts put pressure on the government headed by Premier BorisJohnson.

The Bank of England is facing a dilemma. On the one hand, it is necessary to increase interest rates to push down soaring inflation. On the other hand, the domestic economy needs stimulus measures. Indeed, a decline in the living standards of the Britons alongside huge taxes and utilitybills will put a lid on further economic growth amid a sharp contraction in consumer spending.

No wonder, the British pound has been in a free fall. The ailing economy dipping into recessionon the back of consumer inflation at 7.0% sets the stage for protracted weakness in the pound sterling because the authorities cannot generate any efficient solutions to such problems. Buyers of risky assets recently defended 1.2185 for a short while. Now they are trying to assert strength at around 1.2245 because an escape beyond this area will reinforce an upward correction.

It turned out that fundamental data released today did not help the bulls. I would recommend selling GBP whenever an upward correction occurs. A breakout of 1.2245 will instantly push the trading instrument down to 1.2320 and 1.2400. A breakout of 1.2185 will reinforce the bearish market that will open the door to lower lows at 1.2120 and 1.2070. The most distant target under such conditions would be support at 1.2030 which could be updated in case the UK economy gets worse.

Now let's discuss the GDP report. As I mentioned above, the UK gross domestic product logged a 0.1% downtick in March 2022 on month, the Office for National Statistics reported today. Thenational economic output expanded by 0.8% in Q1 2022, shy of the forecast for at least 1% growth.

Experts say that amid such sequential growth, industrial production recovered to above the pre-pandemic rates for the first time. Nevertheless, experts do not expect notable growth afterwards. They warn that the sharpest inflation surge since the 1980s will make the economy lose momentum and perhaps slip into recession. Contraction in incomes is one of the reasons to push the economy into recession at the nearest time. On the plus side, contraction in household incomes will cool down inflation. On the minus sise, a slowdown in economic growth is an inevitable consequence.

Lately, the Britons appeal to the government to lend a helping hand to households. The is arisk that 4 million people in the Kingdom will get trapped in poverty amid high consumer inflation, in particular soaring food and energy prices. Chancellor of Exchequer Rishi Sunak is working on a relief package that could be signed into law this summer.

The other day, Rishi Sunak stated that British households are going through a challenge, though the national economy has been logging modest economic growth in the early months of the year. The finance minister followed suit with other policymakers and shifted the blame to Russia. He noted that the fragile economic recovery in the UK was derailed by Russia's brutal invasion of Ukraine. It led to regular disruptions in supply chains and escalated inflationary pressure.

Table: Britons might face the worst year in terms of living standards over the history of surveys

Black square: real disposable households' income

Blue square: Forecast

Source: Bank of England

Back to macroeconomic data. Consumer services dropped 1.8% in March because of a sharp 2.8% decrease in wholesale and retail trade. The industrial output of the service and manufacturing sectors edged down by 0.2%. The overall deficit in goods and services trade, excluding precious metals, swelled by 14.9 billion pounds to 25.2 billion pounds, the biggest deficit since the beginning of such surveys in 1997. Such a humongous deficit certainly overshadows a normal pace of growth.

The UK economy is expected to go down in Q2 2022. The next pain will resurface in October when utility bills will surge by another 40% due to high gas and electricity tariffs. Last week, when the Bank of England announced another rate hike, it came up with the forecast that inflation would surpass 10% in October, 5 times higher than the target level set by the central bank. The Bankof England also predicts that the domestic economy will stall its growth in 2023 and 2024.