Forex Trading Library

UK GDP: A Lifeline for the Pound?

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Cable’s months-long slide through the summer has gotten some relief over the last few days as the dollar takes a bit of a breather. But, it might take something a little more substantial to push the pound back up against the greenback. Fortunately for cable bulls, there is a trove of UK data coming out tomorrow that could shake up the markets. But, there is also a decent chance that cable bears could get good news too.

The situation for cable is that the BOE looks to be trying to get out of the hiking business, despite the still high inflation. Other central banks are doing the same as the global economy is seen teetering on the edge of slowing down. The main reason that the BOE has been hesitant to take a stronger stance on inflation since the start is the worry it will hurt the economy.

There could be some good news

The IMF recently increased its outlook for economic growth in the UK this year, from 0.4% to 0.5%. Hardly anything to celebrate, but now the UK is expected to be only the second worst performer of the G-7, instead of the worst. That title is now held by Germany. It’s likely not enough to convince the BOE to keep tightening. To get expectations of higher rates and therefore a stronger pound, some outperformance in UK GDP figures would be needed.

The UK’s August GDP growth read is expected to come in at 0.1%, a substantial improvement from the -0.5% reported in July. With two months of data for the last quarter, it would still be pointing towards negative quarterly growth. Meaning that if the UK doesn’t manage to pull out some stronger growth by the end of the year, it could still fall into technical recession. Hardly the conditions to convince BOE members to keep tightening. But, a substantial beat over expectations could help make the case that the UK economy could withstand more tightening.

A closer look at the data trends

The other important data point for the pound is the trade balance, which is an indicator of the resilience of the economy. A weaker currency would presumably increase exports, and that would help the economy. But the August UK trade balance is expected to remain largely unchanged at -$14.2B compared to -$14.1B prior.

A disappointing trade balance is likely more a sign of general global economic doldrums. Europe, in particular, is seeing its economy in a tight spot. As the UK’s largest trade partner, the lack of economic growth in Europe is likely to also weigh on the British economy, and tangentially weaken the pound. The question is whether the Euro weakens faster than the pound, so see whether the EURGBP cross might be an opportunity if cable doesn’t rebound.

Looking forward

While the UK’s Treasury Secretary Jeremy Hunt tried to put a positive face on the IMF’s upgraded forecast for this year, the financial body lowered its expectations for next year by an even bigger amount. Previously the UK was forecast to see 1.0% growth in 2024, but that was cut to just 0.6%. With the BOE likely to keep rates at least at current levels, monetary policy is likely to weigh on growth and the pound.

Meanwhile, UK manufacturing production is expected to show a 3.3% growth rate compared to 3.0% prior, showing remarkable resilience in the otherwise gloomy economic landscape. That could offer a glimmer of hope that UK GDP might outperform, and eventually give the BOE some room to keep supporting the pound.

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