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UK Q3 GDP and Future of Pound Slump

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Last week, cable had its best performance this year after rising over 2% over the course of five days which included the Fed and BOE meetings. But, it wasn’t enough to overcome the slide it has been in since peaking in July. Subsequently, the pair has been on the backfoot, which has created speculation the gains were just a short-term correction.

But, tomorrow there is a trove of data that has potential to give the pound a bit of a boost. This might be necessary for cable to gain any substantial ground, since the rise last week was largely due to weakness in the greenback. Investors have become increasingly convinced that the Fed won’t go through with their final hike this year, and leave rates unchanged for quite some time.

The Divergence of the Two Unions

The BOE is also expected to keep rates at the current level for a long time. In fact, the market doesn’t fully price in a rate cut until September of next year. But what differentiates the two currencies is the bias. The US economy grew at an annualized 4.9% in the third quarter, and the UK will report its figure tomorrow, with analysts being significantly less optimistic.

Q3 GDP growth in the UK is forecast to come in at 0.0%, slower than the 0.2% reported in the prior three month period. Because this is exactly on the line between growth and contraction, a beat or miss could reignite optimism or affirm the pessimistic narrative. Just one decimal of miss could open up the possibility of the UK falling into a technical recession like its largest trade partner across the English Channel. But a beat of just a couple of decimal points could suggest that the UK economy not only could avoid a recession, but might be seeing some light at the end of the tunnel. That’s because positive growth would imply that the annual rate would increase from the 0.6% reported at the end of last quarter, above the current expectations that it will be unchanged.

The Other Important Data

As is usual for the UK, there is a trove of data coming out at once, which could cause some extra volatility around the GDP numbers. One of them can be an indication for why the UK might avoid a recession: September Industrial output is expected to pop back into expansion at 0.1% compared to -0.7% in August. The trade deficit is forecast to see marginal growth to -£3.6B compared to -£3.4B, which could be attributed to the weakness in the currency.

Those figures add to the growth in wages over the last several months, which have managed to stay ahead of inflation despite CPI change being well above the BOE’s target. With manufacturing staying positive and consumer demand holding up, the UK could potentially avoid a recession, which could keep the pound relatively elevated.

Is There a Spanner in the Works?

The main issue for the BOE has been concern that economic growth could tip into negative, which has left markets assuming that tightening is done. However, the BOE’s Governor Andrew Bailey has twice this week tried to shore up the bank’s commitment to bringing inflation down, insisting that even though rates might not go up, it’s too early to talk about rate cuts.

A miss on the GDP figure could convince the markets that Bailey is trying to rely on rhetoric, and more tightening won’t happen. That could hurt the pound, and push cable back into the downward trajectory that has been the theme so far in the latter half of the year.

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