Thursday has the release of the most important data that could affect the GBPUSD this week. There has been considerable uncertainty about what to expect from the BOE, leading to wide swings in market forecasts over the last few weeks. While the pound has underperformed in March, it has been in recovery mode in April.
On Tuesday, the pound shot higher amid reports that US and Iranian representatives were expected to renew talks later this week. This allowed GBPUSD to recover from all its March losses, suggesting a new forex paradigm if the war is over. What could be crucial in determining how the pound performs going forward is developments in the UK economy, which is why Thursday’s data is particularly relevant.
Markets Take Hawkish View of the BOE
The latest fluctuations in cable reflect the pattern of wide swings in expectations amid developments in the war with Iran. Back in February, the market was pricing in BOE rate cuts, with the first as soon as the April meeting. That shifted abruptly in March, with markets even suggesting four rate hikes by the end of the year. After the ceasefire and advances towards ending the war, the markets have calmed down and are now pricing in between one and two rate hikes. The odds vary depending on the level of optimism ahead of the talks.
After its last meeting, the BOE took a wait-and-see attitude. But the markets have adopted a decidedly more hawkish view now. This contrasts with the Fed, which is expected to keep rates unchanged for the rest of the year or cut them. The more hawkish BOE compared to the dovish Fed gives the pound the advantage over the greenback.
UK Economy Key For Cable Path
The issue is that even if the war is over soon, economists expect higher energy prices to linger for months. This would put upward pressure on inflation, keeping the BOE on a more hawkish path. However, if the BOE hikes aggressively to control consumer prices, it will slow the already anaemic economy, which could hurt the pound. The sweet spot for cable to rise is when the BOE is seen as modestly more hawkish, making the interest premium attractive but not so aggressive as to hurt the economy.
How much the BOE can hike will depend on the state of the British economy before the war, which we will learn from Thursday’s data release. If the economy is growing, it gives more room to absorb the impact of the war, and could keep the pound elevated. However, if GDP is under expectations or negative, it could hurt the pound as investors worry that higher rates will drive the economy even lower.
What the Market Is Looking For
The consensus among analysts is that UK February GDP will accelerate to 0.1% from 0.0% in the prior month. Analysts note that February PMIs were higher than in January, indicating an upward swing in the UK economy that would have supported a stronger Q1 GDP if the war hadn’t happened.
The concern is that PMI data for March showed a turn downward, so February GDP could set a high-water mark. If it’s strong, the market could expect the UK economy to remain more resilient as it deals with the effects of the war in the Middle East, which could support cable. On the other hand, if the economy underperforms, it could indicate further trouble in March, and even Q1 could fall into negative. That would likely drag on the the pound, and push the GBPUSD back down.
