UK GDP Preview: Negative Growth?

Tomorrow's first look at the UK's economic performance from the last quarter isn't likely to
reassure investors much after the BOE forecasted five quarters of negative growth.
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What's coming up

The UK releases a plethora of data before the open tomorrow, but where markets are likely going to focus is on the advance reading of Q2 GDP. And here things are a little complicated because of the relative comparables. Quarter-over-quarter change is expected to be the focus since it's forecast to come in by just barely negative. It could be the first in a series of negative results which would indicate a recession. But a beat of just two decimals could lead to the UK avoid the first step towards a technical recession.

Quarterly Q2 GDP is forecast to have shrunk -0.2% last quarter, compared to +0.8% in Q1. The thing is, Q1 had the advantage of being compared to the last quarter of last year, which included the rise of the omicron variant of Covid. The outsized growth in Q1 was a reflection of the recovery in the services sector primarily.

Where things are going

A similar situation is seen in the annual GDP figure, which is expected to show 1.3% growth compared to 3.5% prior. This is because the latest quarter is compared to the spring of last year when there was more activity.

Though of more concern is the monthly (June) GDP figure, which is expected to come in at -1.3% compared to 0.5% prior. This is despite the government's announcement to assist people dealing with higher energy prices.

Cable likely is already pricing in a negative result (yesterday’s rally ensued due to a weaker dollar), but could get a bit of a rebound if the results beat on the "faster" indicators, such as monthly GDP.

GBP/USD above 50 SMA

After taking out the 50-day SMA of $1.2100, the next major level is at the 200 equivalent, currently at $1.2840. Short-term, the $1.2340 and $1.2460 swings are more likely to be hit on a positive GDP.

Inversely, the 50-SMA is immediate support with a break down below at $1.1930 coming into the bears’ range. There, an inverse head and shoulders could form, unless weakness prevails until a double bottom. Bullish MACD divergence supports the idea of a bigger bounce.

Key takeaways

UK’s Q2 GDP is forecast to come in by just barely negative. It could be the first in a series of negative results which would indicate a recession, but a beat of just two decimals could lead to the UK avoiding the path to a technical recession.

Expectations are that quarterly GDP will be negative, but of more concern is the monthly figure as it is expected to fall by -1.3%. Cable prices are likely already pricing in a negative result, so this might be a good time for investors to take advantage of a potential monthly beat.