Cable is just off of three-week highs ahead of a major data release that could push it higher or cause a retracement. The BOE outlook will also be in focus, as the market is convinced there will be a rate hike this year, but just not sure when. The timing could be crucial for how the GBPUSD reacts to the data coming out this week.
The latest boost to cable came after the dismal US jobs data on Friday. Now it’s UK data’s turn, with GDP growth figures the highlight of the week. The growth rate in the economy is arguably more important for the pound than monetary policy in the current environment. Deficit hawks are circulating to push the currency lower if the economy underperforms, while the interest rate gap with other major pairs remains fairly steady.
Slowing Economy, But Hike Still Expected
Markets are expecting the economy to slow down through the middle of the year, matching BOE data. Q2 is projected to have the weakest growth, weighed down by the impact of higher energy prices and domestic political uncertainty. Therefore, traders could be looking at the upcoming data release as a “baseline” for an expected rebound later in the year.
That surge in growth in Q3 is vital for the BOE to follow through on a rate hike to tame inflation, and keep the pound buoyant. If the central bank is forced to raise rates amid a slowing economy, it would likely weigh on the currency.
What the Market is Looking For
The consensus is for UK Q2 GDP to slow to 0.3% growth, halving from the 0.6% reported in the first quarter. However, the slower number might actually be cheered by the market, because it would be achieved in the face of notable headwinds. It will also allow for hope of a rebound in the second half of the year as businesses adapt to the new circumstances caused by the war in the Middle East.
Markets are therefore likely to be paying close atteinto to the June GDP reading which comes out at the same time. It’s forecast to remain unchanged at 0.1% growth. A beat could indicate that the economy is already starting to improve, and might generate a positive reaction in the markets even if the Q2 figure is in line with consensus.
Momentum and BOE Outlook
There are a couple of indicators for the June GDP accelerating, including stronger than expected retail sales in the month thanks to warmer weather and World Cup spending. However, the weather might have a negative effect in later months, as the heatwaves of July and August are expected to have cut productivity in the economy. Economists have suggested that increased government spending over the last three months could offset some of the slowdown, which could be positive for the pound.
As for the BOE, the market is still pricing in one rate cut for this year, but there is considerable doubt whether it will be in September or November. A sold GDP print could give the BOE a green light to tighten at the next meeting, keeping interest rates in line with the Fed, which is also expected to hike at the same time. If not, the pound could weaken a bit, as traders delay their expectations for BOE tightening.