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UK Q2 GDP Expected To Be Positive

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The consensus among analysts is that the UK will have managed to scrape out a very small amount of growth in the second quarter. Tomorrow sees the publication of the preliminary version of the data, which could be subject to revisions later. The market reaction might depend more on psychological factors than the potential impact on monetary policy.

UK Q2 GDP is forecast at 0.1% growth, which would be the same as the prior quarter. Interestingly, and as a sign of the less-than-stellar performance of the British economy, annual GDP is also expected to be 0.1%. This creates more risk for the markets, because if it’s off by just two decimals, it could turn negative.

Just how negative will move cable?

If the quarterly GDP figure turns negative, then it opens the risk of the UK falling into a technical recession if Q3 is also negative. That could end up spooking the markets more than the actual effect of two or three decimals of a miss. Economists still see around a 60% risk of a recession over the next twelve months. A positive Q2 number would at least postpone that for another three months.

However, it’s a relatively unlikely eventuality, because two months of readings are already in, and they balance out to be pretty flat. The expectation for a positive quarterly GDP figure is based on projections that June economic activity picked up to grow 0.2% compared to -0.1% in May. That is even despite the extra bank holiday. A beat on the monthly GDP figure could leave markets a little more reassured that the BOE is right in its forecast that the UK will avoid a recession.

A more positive scenario

A beat or a miss of a couple of decimal points is unlikely to realistically change the expected trajectory for the BOE. Inflation in the UK remains extraordinarily high, and the central bank is expected to keep tightening through the rest of the year. What could be up for debate, however, is the pace at which the tightening happens.

If the economy is robust, and beats expectations, that could leave the BOE feeling more comfortable with maintaining the current pace of rate hikes. A miss that turned the GDP negative for the quarter might leave traders wondering if the BOE will opt to skip a month or two. There has already been some speculation that the BOE could slow the pace of rate hikes.

The situation with cable

The pound has been on an upwards trajectory as the BOE keeps raising rates and inflation comes down. But in the last few days, global market sentiment has turned risk-averse, for reasons outside of the British Isles. China’s disappointing trade results and Fitch’s downgrade of US debt left markets worried about future growth. The appetite for safe havens has boosted the dollar at the expense of the pound. And the UK having a slightly better than expected GDP figure is unlikely to change global risk perspectives.

UK industry has been the larger drag on the economy lately, as it has been facing the effects of persistent and recurring strikes. But June manufacturing production is expected to return to growth. If that can be maintained in the coming months, then cable could return to is general upwards trajectory that it has maintained since last October.

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