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Pound declines as UK rate cut bets grow after surprise GDP shrink

The U.K. economy unexpectedly contracted in November 2019 on the back of falls in production and services sectors as rate cut bets grew ahead of the Bank of England's upcoming monetary policy meeting.

The country's month-over-month GDP fell 0.3% after a revised 0.1% growth in October 2019, data from the Office for National Statistics showed. The consensus estimate of economists polled by Econoday was for GDP growth to remain unchanged in November 2019.

Pound declined 0.7% to $1.2976 around 5:20 a.m. ET. Markets are now pricing in a 49% probability of a rate cut on Jan. 30, compared to a 21% likelihood of monetary policy easing from Jan. 10, according to the BoE watch tool of the CME Group.

On a monthly basis, production and services output declined 1.2% and 0.3%, respectively, after posting growth rates of 0.4% and 0.3%, respectively, in the previous month. The manufacturing index fell 1.7% after rising 0.5% in the prior month.

Construction output rose 1.9% in November 2019 while agriculture output edged up 0.1%.

BoE policymaker Gertjan Vlieghe told the Financial Times that he would favor an interest rate cut at the upcoming monetary policy meeting, if the U.K. economy does not rebound. Another monetary policy committee member, Silvana Tenreyro, also voiced support for a rate cut if the uncertainty surrounding the post-Brexit relationship between the U.K. and EU does not wane.

Two other officials of the nine-member committee, Jonathan Haskell and Michael Saunders, have voted for a reduction in the benchmark rate since November 2019, the FT reported.

The BoE's outgoing Governor Mark Carney also indicated that the central bank could pursue more stimulus measures to spur growth in the British economy. The governor said the U.K.'s economic growth is expected to pick up from its current below-potential rates, helped by reduced Brexit uncertainties, easing fiscal policy and a modest recovery in global growth.

"This rebound is not, of course, assured," Carney said, noting a sluggish economy and inflation that remains below the central bank's target.

In the three months to November 2019, the country's GDP growth ticked up 0.1%, compared to a 0.2% growth rate in the three months to October 2019 and the Econoday's projection for the economy to contract 0.1%. The index for production declined 0.6% in the three months to November 2019, while output in the services and construction sectors rose, by 0.1% and 1.1%, respectively.

The decline in production output was led by manufacturing, which fell 0.8%.

The U.K.'s manufacturing sector ended 2019 in contraction territory, with December output declining at the fastest pace since July 2012, data from IHS Markit and the Chartered Institute of Procurement & Supply showed Jan. 2. On Dec. 17, 2019, the Confederation of British Industry said that U.K. manufacturers' order books unexpectedly dropped further in negative territory in December 2019 and output volumes fell at the quickest pace since the financial crisis. In addition, the U.K.'s retail sector had its worst showing on record in 2019, with annual total sales slipping into contraction territory for the first time, the British Retail Consortium said Jan. 9, 2020.

S&P Global Ratings expects U.K. GDP growth to reach 1.3% in 2019 before slowing to 1.0% in 2020 and then rising to 1.7% in 2021. Meanwhile, Pacific Investment Management Co. LLC said U.K. economic growth is likely to be "modestly below trend" at 0.75% to 1.25% in 2020, down from a projected expansion rate of 1.3% in 2019.

Meanwhile, the U.K.'s goods and services trade surplus widened by £600 million to £1.1 billion in the three months to November 2019, largely due to increasing exports of unspecified goods.