The GBPUSD has been range-bound so far this month at a level just above summer lows, despite a relatively hawkish outlook from the BOE. The dollar’s strenght has kept a lid on the pair, as investors appear hesitant to jump in ahead of significant risk events this week. However, those data points might shape the trajectory of the currency pair in the weeks ahead, particularly if they affect the market’s outlook on the BOE.
Futures indicate that there is an over 90% chance that the Bank of England will hike at its upcoming November meeting. However, after forgoing a hike on a 6-3 decision back in September, a 25 bps bump up in the interest rate would be just keeping up with other central banks that raised last month. Now, the global consensus among central bankers is becoming more cautious, leaving the BOE still uniquely hawkish. Traders will be looking at the data to assess whether Britain’s central bank will likely turn more dovish after November 5th.
What the Market Is Looking For
As is customary, the UK will drop a barrage of data ahead of the market open on Thursday, but the figure that’s most likely to affect the market is the monthly GDP reading. The consensus among economists is that Britains’e economy shrank by -0.1% in August, a notable decline from the +0.4% growth in July. However, the rolling three-month average is projected to stay unchanged at 0.4% growth, as economists believe that British businesses and consumers brought forward purchases amid uncertainty in the summer.
At the ame time, Britain’s trade deficit is projected to be fairly stable at -$3.6 billion compared to -$3.05 billion a month earlier. Monthly manufacturing production is anticipated to stay flat, compared to 0.9% growth in the prior month, amid higher energy costs and reflecting softer demand.
How the Market Could React
The GDP figure has several avenues in which it could affect the GBPUSD. If the economy is slowing, that means pound-denominated assets are likely to generate a lower ROI. A softer economy means nvestors are less likely to buy pounds to invest, which would weigh on the currency. If the economy is resilient, then investment in the UK could increase and support the pound.
Another avenue is that a slower GDP figure would mean that the government has less revenue to deal with its mounting debt problem. As Chancellor John Healey prepares his Autumn Budget for publication in two weeks’ time, economic performance would likely determine how much headroom he has for increased spending.
Will UK GDP Figures Change BOE Odds?
If the market suspects that government finances will be under pressure, then long-term yields could rise, signalling increased risk and weigh on the pound. It would also reduce the tools the Chancellor has to revive the economy. But if GDP figures outperform, then markets could get a relief bounce, and regain some ground against the dollar.
Economic headroom is also an issue for the BOE. If the economy contracts significantly more than expected, there would be less inflationary pressure, making it harder for hawks on Threadneedle Street to justify another hike. But a strong economy would invite the BOE to keep up with other central banks.
