UK GDP Preview and GBPUSD

Following the UK's technical recession last year, investors will be attentive to determining whether there are early signs of renewed growth or if economic conditions will persist until the BOE eases monetary policy.

Possibility of Data Revisions

A couple of weeks ago, ONS reported that the UK economy contracted for two successive quarters, meeting the technical definition of a recession. However, official economic data are often subject to revision. Substantive revisions have occurred recently for both the EU  and Japan, where updated figures showed the two economies avoided recessions. The UK's final GDP report at the end of the month will confirm whether an actual recession transpired.

In the interim, upcoming data releases may provide insight. Preliminary GDP growth for January and the three-month average will be published tomorrow. Yet, these indicators could complicate monetary policy assessments. Recent evidence suggests inflationary pressures persist, especially in services. Sustained growth in this sector may signal that inflation remains problematic, potentially delaying interest rate cuts. Definitive conclusions will depend on data revisions and forthcoming economic performance.​

The Data and the BOE

Economists are again predicting that interest rate cuts will come in Q3 (having briefly predicted a cut in Q2). Generally, the markets expect the BOE to be the last major central bank to begin lowering rates, with futures pricing in an August cut. Recently, more analysts have been pushing back their forecasts for rate changes in light of persistently low inflation despite meagre economic growth.

This pushback in expectations of easing has coincided with a weaker US dollar over the past few weeks, boosting the pound against its American counterpart. Better than anticipated economic performance at the start of the current quarter could affirm this narrative. However, should the UK recession be expected to be prolonged again, the market may once more see the BOE cutting rates sooner. UK monthly GDP for January is expected to return to positive growth of 0.1% from -0.1% in December, contributing to a rolling three-month average of -0.1%, an improvement over the -0.3% for Q4. In the meantime, growth in Manufacturing Production is projected to reverse to -0.3% from the prior 0.8%.​

Cable Pulling Back?

The British pound broke past the flag pattern top at $1.2720 against the US dollar; however, the measured-move projection to $1.3040 has not been fully realised. GBPUSD peaked just below $1.29 before retracing towards $1.2762, near the breakout point. Failure to maintain prices above $1.27 could cause the pound to weaken further to around $1.26. Conversely, a move back above $1.2820 may provide the impetus for a leg up to the psychological resistance of $1.30, having previously broken the peak.

Source: SpreadEx / GBPUSD

Key Takeaways

The preliminary UK GDP figures for Q3 will be closely watched as the economy seeks to recover from recession. The BaOE will analyse the data to inform future monetary policy adjustments, with ongoing contraction heightening stimulus expectations, while a return to growth could relieve pressure for further rate cuts in the near term. Investors will hope for signs of stabilisation or that easier financial conditions are taking hold. UK monthly GDP is expected to return to growth of 0.1% in January versus -0.1% in December, potentially improving the three-month average. However, better data could affirm analyst expectations of the BOE being the last major central bank to lower rates.​