UK Q2 GDP Amid Stronger Pound

Cable is around a three-week high ahead of UK monthly and Q2 GDP figures, which could be crucial for narrowing down the timing of the expected BOE rate hike later this year.

The Factors Moving the Market

• UK Q2 GDP is expected to remain resilient, growing 0.4% compared to 0.6% in the first quarter, despite the geopolitical situation.
• The BOE is expected to hike, but so are other central banks, so the impact of monetary policy on the exchange rate could be muted.
• Focus remains on economic growth as fiscal hawks are on alert for new spending in the Autumn Budget.

UK Economy Slowing, But Hike Still on the Way

The pound has been trading fairly steadily against the dollar since the GPBUSD jumped last Friday in the wake of softer US jobs data. Markets are expecting the British economy to slow slightly in the second quarter, pressured by higher energy prices and domestic political uncertainty. With both the Fed and the BOE expected to hike later in the year, markets are focusing more on economic data to gauge the pound's health. The UK government's finances are tight, which might force it to take measures that will upset long-term bondholders and push up long-term yields. This would weigh on the pound, as it increases the risk to British financial institutions. Faster economic growth would increase the government's tax revenue, giving the Chancellor more room to meet increased spending plans. Fiscal hawks would be reassured by faster growth, and this could support sterling, which is just off highs not seen since early July.

The focus for the data will likely be on the quarterly results, with Q2 GDP anticipated to have grown 0.4%, slower than the surprise 0.6% in Q1. However, the resilience in the face of headwinds could give markets hope that the economy will rebound in the second half as businesses adapt to the effects of the war in the Middle East. To confirm that, markets will be looking for June GDP to stay positive, with the consensus at 0.1% growth, the same as in May. A beat in the June data, even if the Q2 figure is within expectations, could generate a positive reaction from the markets, as it would imply an acceleration in the economy. However, they would have to overcome some already expected positive signs, as June retail sales were supported by warm weather and World Cup spending. Traders will be looking for signs of growth beyond those temporary supports.

Signs of Gathering Momentum

The BOE projected the economy would remain weak, given sluggish consumer demand and slack in the labour market. Economic growth has been relying more on government spending, but economists are warning that the heatwaves could weigh on economic growth through the summer. On the other hand, increased government spending has helped support the economy, which has managed to outperform forecasts. This is crucial for the pound outlook, as a BOE rate hike would likely weigh on the economy and, by extension, the pound. After the central bank's hawkish hold last month, markets anticipate a rate hike at the September meeting to counteract higher inflation. But with other central banks also expected to raise rates around the same time, it might provide limited support for the pound, unless the economy continues to show unexpected resilience.

GBPUSD Biased Up Ahead of UK GDP

With GBPUSD near the upper VWAP after finding resistance at the upper pro-trend line near 1.3500, a pullback could see prices move back to 1.3420. This would open the door to the opposite trendline near 1.3360, forming a potential triangle pattern. However, a breakout higher would suggest a pennant pattern has already formed, exposing the upper VWAP at 1.3577 and ultimately the peak at 1.3660.

Source: SpreadEx | GBPUSD, Daily Chart