As is customary, the UK will give an avalanche of data before the market opens on Friday, but the GDP figure might be the most important of the figures released. The BOE is expected to be one of the slowest to roll out monetary easing. But, if the British economy underperforms, then it might not have any choice but to speed up its cutting program.
The British pound has been bucking the global trend lately, thanks to those expectations of little easing. Not only has it kept pace with the stronger dollar since the US election, it actually rose through November. But the September GDP data came in worse than expected, and that got the market to finally start pairing back sterling’s gains. The question for traders now is whether that downward slope will accelerate, depending on the data.
What to Look Out For
UK October monthly GDP is expected to accelerate to 0.2%, a clear improvement over the -0.1% in the month prior. But, this would keep the rolling 3-month average unchanged at 0.1%. The hope for those expecting an acceleration in the economy is that September was an outlier, as businesses digested the effects of the election and the budget. Those that are worried it will underperform suggest that the Budget wasn’t known until the end of October, which could have kept investment depressed for that period.
The Government, on the other hand, is banking on an acceleration of the economy, expecting it to hit 2.0% next year. This would be necessary to fund its increased expenditures within the budget and avoid increasing taxes again. If the economy shows further signs of stagnation, it could leave investors worried about payments, and that could push up the yield on British debt. Counterintuitively, that would likely support the pound, giving the market an unexpected reaction if the data disappoints.
Why It Matters
The BOE has been tempering expectations for easing since the autumn, arguing that services inflation remains elevated. This is in part thanks to a strong labor market that has kept salaries growing faster than inflation. But, a slowdown in the economy would mean loosening in the jobs market, and finally put an end to the stickiness in inflation.
On the other hand, growth at (or above) expectations would mean that the effect of the Budget is likely temporary, and the economy could pick up going forward. We have to remember that the UK slipped into a technical recession last year, so is on a “rebound” track. That would likely keep services inflation higher, and give room for the BOE to keep rates up.
What’s the Outlook
For now, the narrative the market seems to be sticking to is the higher for longer BOE. It is pricing in a 95% chance that the monetary policy meeting next week will be a hold. But, there is labor and inflation data coming out just before the meeting, besides the GDP figures from Friday. Both of which could move the currency if they come in outside of expectations.
But, that narrative could change a bit if the GDP figures disappoint, particularly if growth is negative for a second consecutive month. That could start speculation that the UK Q4 GDP will be negative, implying slower inflation, and therefore the BOE might be forced to start easing next year. If the narrative switches like that, it could mean the pound finally starts trending lower.
