London Waits for US, UK GDP and PCE Data

The US is expected to confirm slowing economic growth in the first quarter, while the UK is seeing a rebound, but the focus remains on inflation to determine whether the Fed or BOE will begin cutting interest rates first.

Confirming Improving Trends

Tomorrow, the US will provide a third and final reading of its first quarter GDP figures, which is anticipated to confirm the unexpected slowdown in the economy to 1.3% annualised growth compared to 3.4% in the prior quarter. While GDP figures sometimes have final changes, current attention seems focused on the current quarter. The second quarter GDP is forecasted at 3% by the Fed's nowcaster, suggesting that the first quarter was anomalous and that the economy continues to grow. This could challenge a dovish outlook for the Fed.

Across the Atlantic, the United Kingdom is expected to confirm its rebound from last year's technical recession with 0.6% quarterly growth. However, annual GDP growth is anticipated to remain modest at 0.2%. Meanwhile, continued services weakness could provide more impetus for the BOE's expected easing path, as a potential rebound in inflation back from target remains a concern. Current consensus indicates the BOE will cut at the start of August, beating the Fed by over a month, which may impact cable.

Moving in the Shorter Term

Key upcoming US inflation figures on Friday could affect GBPUSD in the shorter term. While markets believe the latest UK inflation supports a more hawkish BOE, views differ on the FOMC's reduced rate cut forecast to one for the year. Traders may examine the Fed's preferred inflation gauge to clarify whether consumer prices support the expected September cut.

Analysts forecast that the monthly core PCE price could fall from 0.2% to 0.1%, consistent with the lower inflation needed to justify easing. The annual core figure of around 2.6% may also ease gradually from 2.7%. However, a higher or lower-than-expected reading could postpone projected rate cuts.

Cable Hangs on UK and US Data

Higher-than-expected US PCE could push the GBPUSD below 1.2630 and towards 1.25, with the BOE leaning towards easing. This is particularly the case as support at 1.2683 was recently lost. However, a lower PCE may have a smaller impact, as the Fed is still unlikely to take action before September. As a result, a breakout from the recent tight flag range would be possible, bringing cable to 1.2748 and perhaps 1.28. Effectively, this could remove near-term obstacles for a move higher towards 1.2868 and 1.29.

Source:SpreadEx / GBPUSD

Key Takeaways

The US economy is expected to confirm slower growth in the first quarter, while the UK sees a rebound. However, the main focus remains on inflation, with upcoming UK and US GDP and US PCE figures on Friday likely to affect GBPUSD in the short term. Analysts forecast the monthly core PCE price could fall, consistent with lower inflation justifying the Fed's easing. However, an unexpected high or low reading could postpone projected rate changes.