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UK in recession, but that’s unlikely to sway BoE

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By Craig Erlam  

The UK fell into recession in the second half of last year after GDP figures for the fourth quarter showed a steeper contraction than expected.

While a recession was expected ahead of the release, the fourth quarter number was slightly worse, despite December performing better than anticipated.

The UK has been flirting with recession for some time, but despite the inevitable headlines, Thursday’s data doesn’t change much.

The economy isn’t growing, nor has it for the bulk of the last couple of years. It’s just on this occasion, it’s tipped slightly the other way and recorded two small negative quarters of growth.

Not that flat growth is anything to celebrate, of course, but many feared it would be much worse when rates started rising and increased to the level they have.

The economy, like those in many other countries, has shown significant resilience and is expected to bounce back this year.

The Bank of England won’t be swayed by the technical recession, as Governor Bailey alluded to earlier this week, but weaker household spending may suggest demand isn’t as strong as they anticipated. We’ll get another update on that on Friday from the January retail sales figures.

With inflation expected to fall to target in the second quarter, maybe even further after this week’s readings, the debate around rate cuts could intensify earlier than they would have otherwise thought.

Slower wage growth would obviously help that along greatly.

Oil gives up gains

Oil prices remain volatile and last week’s unexpected and substantial inventory build, reported by the EIA, further added to that. The price fell sharply after the data and continued earlier Thursday before recouping those losses to trade flat on the session.

It’s understandable why crude oil prices are so volatile, there’s tremendous uncertainty around the Middle East, the economy, and interest rates which is generating these large moves.

There has been more of an upside bias of late, but broadly speaking the price remains at reasonable levels that won’t be a concern from an inflationary standpoint.

Significant blow for gold

Gold remains below $2,000 after breaking under the psychologically significant threshold on Tuesday.

The move below appeared to be a reluctant acceptance that rates may not fall as soon or as fast as hoped, a belief that had kept the yellow metal elevated since the start of the year.

Now, $1,980 looks an interesting level as it coincides with various technical support levels and represents a 50% correction of the move from the October lows to the December all-time high.

Bitcoin back to extraordinary gains

Bitcoin is grabbing the headlines once more, fully capitalising on the spot ETF coverage to soar to a new two-year high above $52,500.

When crypto has momentum like this, who knows where it will go next, and that can apply in both directions.

Bitcoin is now up more than 35% in less than a month and I have no doubt it will remain a hot topic over the coming weeks.

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.