FX Daily Strategy: Asia, April 16th

Figure: GDP Growth Hardly Strong and With Increasing Downside Risks Ahead?

Fresh downside surprises were the story from the January GDP numbers and we expect a similarly muted outcome for the looming February numbers.  There were expectations that the economy would enjoy a further successive rise in January, thereby providing the best three-month showing in two years were dashed as GDP instead stagnated and we see a further unchanged m/m figure for February.  Weakness or at least lack of momentum is likely to (again) be broad-based in spite of a possible bounce in real estate. But, as is familiar with recent UK real economy data, we still suggest that even with modest war-induced March GDP decline, it looks more likely that growth last quarter will be no better than the 0.1% q/q seen in Q4, less than consensus and BoE thinking, at least as envisaged back in February for the latter.  Moreover, there may be downside risks as activity (Figure) and sentiment will, of course, be hit either earlier and/or more severely by events in the Middle East.

Even without the Middle East conflict impact, we were suggesting a sub-consensus 2026 GDP picture of 0.8%. Now, while recession may be avoided, the economy is likely to be even weaker ahead as the backdrop and outlook has changed - we have highlighted several scenarios as to how the Middle East conflict will pan out, with our 4-8 week war baseline looking somewhat more likely at this juncture.  But where we see oil and gas prices largely falling back to the pre-war levels within a year, this still results in UK CPI inflation being some 0.5 ppt higher than otherwise, ending this year at 2.5%.  Even so, we are also skeptical about meaningful second round effects occurring, not least given the softer labor market likely to accentuate real income woes. Indeed, even if inflation expectations rise further this is unlikely to result in higher wage deals given the ever-clearer loosening state of the labor market and the likely squeeze on profit margins firms may now face.  This will be a reflection of an economic backdrop where GDP growth may be as low as 0.5% this year, ie almost half the BoE’s pared-back projection made in February.  This reflects already weak demand which we think at least partly reflects tighter financial conditions.

We expect a 0.5% increase in March industrial production with the increase coming from a 0.3% rise in manufacturing, while gains of 1.0% in utilities and 1.2% in mining will each add around 0.1% to the total. Manufacturing signals have generally been picking up with ISM manufacturing data firm, and manufacturing payrolls in March showing the strongest increase since November 2024. However manufacturing aggregate hours worked showed little change, and that suggests only a moderate 0.3% increase in manufacturing output. Payroll data suggests a neutral contribution from autos.

Payroll data was positive for mining and higher energy prices are likely to stimulate output, though a strong response as early as March is unlikely. Weekly electrical output suggests weather-sensitive utilities output will rebound from a dip in February.

With Trump and Vance hyping up market for a deal, it is likely market participants are looking toward the peace dividend. If geopolitical tension eases, the greenback will likely continues its downtrend.

On the chart, USD selling interest is extending with prices reaching support at the 98.10 Fibonacci retracement. Just lower is congestion around 98.00. Minor consolidation is developing above 98.00/10, as oversold daily stochastics flatten. But the bearish daily Tension Indicator and deteriorating weekly charts highlight room for further losses. A close beneath here will add weight to sentiment and extend late-March losses towards 97.50. Meanwhile, resistance is lowered to congestion around 98.50. A close above here, if seen, will help to stabilise price action and prompt consolidation beneath 99.00/18.