Will UK GDP Cause A Cable Rebound?

The GBPUSD came under pressure yesterday amid dollar strength and a lack of domestic UK data to provide a counterweight. But Thursday sees the release of an avalanche of British data right before the open, with the GDP numbers likely to be the most tracked by traders. The question is whether a bump up in the economy will help reassure investors in the value of the pound.

That might be a limited possibility, because the market is already pricing in fairly robust growth in the UK that would allow the BOE to keep hiking. Markets have more than fully priced in a rate hike over the next couple of meetings, but there is considerable uncertainty about the timing. Now that the traders expect the Fed to hike in December, what could determine the course of the GBPUSD is whether the BOE will do the same and maintain the interest rate gap. To do that, Britain’s economy needs to grow at a fast enough rate to allow higher interest rates.

What the Market Is Looking For

The consensus among analysts is that the UK economy accelerated in Q3 to 0.7% growth from 0.5% in the second quarter. This is based on expectations for September monthly GDP to come in flat, a marginal decline from 0.1% in August. On an annual basis, this means the UK economy sped up to 1.9% from 1.4% in the prior three-month period.

The issue for the markets could be in how the monthly and quarterly data diverge, though the latter is likely to have more weight. If the British economy is accelerating, this implies a natural upward pressure to inflation while giving the BOE room to hike. But, if the monthly indicator is a disappointment, it could indicate a near-term slowdown, putting into doubt whether Q4 will see solid growth.

Parsing the Rate Outlook

Last week’s BOE hike was based on expectations that the UK economy will not only have accelerated in Q3, but also increase in Q4. Signs that the British economy is not matching that forecast could leave markets reducing the odds of a December rate hike, dragging the pound lower as a result.

Futures prices imply just over 60% odds of tightening at the next BOE meeting in December, so a relatively small disappointment in the data could have a larger effect on the pound. Particularly after the market showed on Tuesday that it is fairly sensitive to a widening gap between the Fed and the BOE.

Going Beyond the Rate Differentials

Ahead of the data, the market is expecting the BOE and Fed to largely move in tandem over the next year. This would keep the interest rate pressure balanced, with other economic indicators driving the fluctuations in the currency pair. A large shift in GDP data could not only affect the pound through the rate outlook, but also through the attractiveness of the pound in particular.

Sterling recently got a boost from the UK-EU post-Brexit trade barrier reduction announced last week. While positive for the currency, that has already been priced in by the market, indicating that a correction is more likely to hold sway. However, if Britain’s GDP were to exceed expectations, it could draw back investors looking to get into pound-denominated assets.