UK GDP Unlikely to Change BOE’s Plans

The UK is expected to have eked out meagre growth in the second quarter and leave the BOE on its already established hiking path.

Data for the Data-Dependent

The BOE, at its last meeting, said it would be data-dependent on whether or not to hike at the next meeting. After its latest hike, it might move towards a slower pace of tightening, though the consensus remains that interest rates will keep rising. It would likely require a significant change from expectations for the GDP figure to dissuade the BOE. With two monthly figures already reported, June data would have to be really out of line to derail expectations.

What could have more of an impact on cable is the psychological reaction to whether or not the UK registers positive or negative growth. A negative reading would open the possibility of a recession if Q3 also is reported as negative. The UK is seen as potentially falling into a recession next year, with some economists predicting a 60% chance of a slowdown around the general election. Meanwhile, the BOE is still optimistic that the country can avoid a recession, despite market concerns that higher rates would filter through the economy and slow its dynamism, which is already impacted by the cost of living crisis.

What the Data Could Say

The projection that the UK will post a positive GDP in Q2 relies on June economic activity staging a rebound. Retail sales have been in recovery mode, as well as reconstruction, but that could be offset by weaker manufacturing which has been hit by the effects of strikes and an extra bank holiday. June GDP is expected to have grown 0.1% compared to -0.1% in May.

That would leave the first quarter GDP growing at 0.1% on a quarterly basis, the same as in the first quarter. Annual growth would also be just 0.1%, down from the 0.2% posted previously. It would take a relatively small miss of expectations to turn the result negative. The pound has been weaker against the dollar lately as markets have taken on a decidedly risk-averse tone in the wake of poor performance in China and the downgrade of US sovereign rating. A stronger-than-expected GDP figure will unlikely change the outlook for the BOE but could provide more breathing room for potential future hikes and support cable.

Cable in Potential H&S Pattern

A better level for a rise in cable would be down at $1.26, as it would coincide with June's bottom and increase the chances of a head-and-shoulder pattern. The upside potential would be the left-shoulder high of $1.2847, with prices into higher territories likely to invalidate the pattern. The low might have already printed, though, with the door to the near-term resistance wide open while cable trades above $1.2683. Sliding lower would invalidate the pattern, paving the way to $1.2545.

Source: SpreadX /GBPUSD

Key Takeaways

The UK is expected to see minimal growth in Q2, which aligns with the BOE’s plan to continue hiking. A negative GDP reading could potentially lead to a recession. The projection for positive GDP in Q2 relies on a rebound in June’s economic activity, but weaker manufacturing and market concerns may prove worrisome. A stronger-than-expected GDP figure is unlikely to change the BOE’s outlook, but it could support future hikes and cable.