One of the most important data points that could drive cable this week is the release of the UK’s monthly GDP figures on Thursday. With inflation above target and growing slack in the labour market, traders are focusing on growth figures to determine what the BOE will do. If it keeps pace with the Fed’s easing, the pound could trade sideways. But a bump up in the British economy could support the pound, and might even help ease some of the losses against the Euro.
One issue affecting Britain is that, after the Autumn Budget, taxes will rise to the highest level ever as a share of the economy. This high tax burden is expected to continue weighing on growth, potentially reducing government revenue. Investors are already nervous about the country’s ability to service its debt, and if the economy doesn’t pick up, the government could be forced to borrow more. With the highest interest rates of any major economy in the world, those higher rates could cause a significant tumble in British assets. This is why the trajectory of the UK’s economy is closely watched by forex traders and could be pivotal for the pound’s evolution.
The Market and Economists Disagree On the BOE
After the BOE cut rates back in December, the outlook for interest rates has become somewhat murky. At the start of the year, markets were pricing in a sharp rate cut, as inflation briefly fell to target. But, in the end, the BOE took a much slower approach to easing as consumer prices remained elevated.
Going into the new year, markets are considerably more cautious about predicting cuts. In fact, futures markets indicate that traders expect the BOE to remain on hold for the rest of the year. Economists, on the other hand, are predicting as many as three rate cuts, arguing that the job market will continue to weaken and inflation will come down. The BOE also said that inflation had peaked. But that slack in the jobs market, which will translate into lower inflation pressure, is expected to be due to a slowing economy.
What to Look Out For
Analysts’ consensus is that UK November GDP shrank again by 0.1%, the same as a month earlier. This would also put the rolling three-month growth rate at -0.1%. Two months of negative growth in the quarter would create a high bar for December to pull the Q4 reading into the green. This could set the UK up for a technical recession if the economy doesn’t pick up pace in 2026.
Markets might look past the GDP figure, however. Businesses and consumers were in a holding pattern ahead of the Autumn Budget, announced on the 26th of the month. Since the budget wasn’t as restrictive as feared, there is some hope that the economy accelerated afterward.
The Potential Market Reaction
Some analysts are more optimistic and expect that the GDP number will be positive. They note that retail sales were weak, but this could be offset by increased hotel and restaurant spending.
However, even the most positive forecasts still project the British economy will grow by 0% in the final quarter of the year. Unless there is a major beat, the market could remain cautious about the pound’s performance. High rates at the far end of the curve could keep downward pressure on cable for now.