Confidence Wanes, Pound Drains: How Consumer Confidence is Impacting the GBP/USD

15 Feb 2023

By Eric Lee, Sales Director, Phillip Nova

The United Kingdom (UK) has faced challenges since the Brexit vote in 2020, adding stress to the already weakened Pound. Typically, the country’s economy, including its real GDP, is a major factor in determining the strength of its currency. Goldman Sachs predicts a contraction of 1.2% in the UK’s real GDP in 2023, which is similar to the 1.3% contraction forecasted for Russia by the bank. The main reason for the contraction in the UK is due to a sharp decline in household living standards, causing higher inflation and interest rates, which has significantly reduced household purchasing power. As a result, the year-on-year GDP growth rate has continued to decline since June 2021.

The number of company insolvencies in England and Wales has increased since April 2021 and has reached its highest level since 2009 in Q2 2022. In August 2022, over 10% of UK businesses reported a moderate to severe risk of insolvency, with energy prices being a major concern for 22% of businesses. The construction, manufacturing, accommodation, food service, wholesale and retail trade industries together accounted for over half of the business insolvencies in H1 2022 in England and Wales.

Retail sales in Britain experienced a record fall in December, with a 5.8% decline in sales volume compared to the previous year. This was due to the cost of living squeeze and the postal strike, which impacted online sales. Despite this, major retailers, including Tesco, Sainsbury’s, and Marks & Spencer, reported better-than-expected Christmas trading updates. The Bank of England is expected to raise interest rates for the 10th consecutive time in February, but retailers and consumers hope the situation will improve in H2 2023.

The chart below plots the GBP/USD currency pair along with economic data, including bankruptcies, GDP growth rate, and retail sales. We can see that the currency pair trends in the same direction as GDP growth rate and retail sales, but inversely to bankruptcies. To simplify, traders can use the U.K. Consumer Confidence Index, which factors in economic data such as employment rates, income levels, and interest rates, as a proxy for all economic indicators.

The U.K. Consumer Confidence Index is a crucial barometer for currency traders looking to trade the GBP/USD pair, especially with the turmoil in the United Kingdom since Brexit. The index has been trending downwards since July 2021, and recent data suggests a continued downtrend. Traders can use technical analysis tools, such as KST crossover downward and the 250-day Moving Average, to make informed decisions when entering the market. If the GBP/USD falls below the support of 1.18, its downtrend may resume, potentially leading to a retest of its parity against the USD.

GBPUSD is available for trading on the Phillip MT5 trading platform

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

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