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Sterling faced significant pressure on Friday, falling by more than 0.3% to $1.2635 after data revealed that the UK economy contracted by 0.1% in October. The latest figures from the Office for National Statistics (ONS) attributed the unexpected GDP decline to downturns in construction and production, while the services sector – the largest contributor to the economy – remained stagnant.
Economists surveyed by Reuters had anticipated a modest growth of 0.1%, making the contraction a surprise. This marks a continuation of lacklustre performance, with a similar 0.1% decline in September and tepid growth of 0.1% in the third quarter, according to figures from last month.
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Institute of Economic Affairs Economics Fellow Julian Jessop warned that these results place the UK on “recession watch”.
“The new government’s negative rhetoric over the summer and the anticipation of a tight budget have damaged sentiment and encouraged many households and business to put spending, hiring and investment on hold,” Jessop said. “The budget itself was even tougher than expected, and the large increases in spending, taxation and borrowing were bound to increase uncertainty.”
Despite the gloomy outlook, Jessop highlighted a silver lining. “The latest GfK survey suggests that consumer confidence actually improved in December, with sentiment on the outlook for personal finances turning positive again,” he noted.
In foreign exchange markets, the pound also weakened against the euro (GBPEUR=X), trading at €1.21. The euro held firm against most currencies following the European Central Bank’s (ECB) latest policy decision on Thursday. The ECB announced its fourth interest rate cut this year, lowering rates from 3.25% to 3%.
Notably, the ECB struck a more optimistic tone by dropping its pledge to keep rates “sufficiently restrictive for as long as necessary” to curb inflation. The central bank expressed confidence that inflation would stabilise at its 2% target “on a sustained basis”.
Gold prices dipped on Friday but remained on track for a weekly gain as investors awaited next week’s US Federal Reserve policy meeting, where the central bank is widely expected to deliver its third rate cut of the year.
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Spot gold fell 0.3% to £2,111.97 per ounce, marking a decline of approximately 0.89% over the past 24 hours. Meanwhile, US gold futures slipped 0.78% to $2,688.70. Despite the pullback, bullion remains up more than 1% this week, having reached a five-week high in the previous session, which prompted some profit-taking.