UK is about to drop May GDP numbers!
Will the growth figures encourage more rate hikes or a higher stance for a longer BoE?
More importantly, how could this week’s release affect GBP price action?
Focus on the event:
UK GDP for May 2023
When will it be released:
July 13, 2023 (Thursday), 6:00 AM GMT
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Expectations:
- May GDP: -0.2% m/m vs. +0.2% m/m prior
- May GDP YoY: expected -0.2% YoY vs +0.5% YoY
Related data since the last data event/release:
maybe PMI Manufacturing Flash Decreased from an upgraded number of 47.8 to 46.9 vs. a 47.9 estimate Flash Services PMI fell from an upgraded 55.9 reading to 55.1 vs. a 55.5 expected to indicate slower growth
CBI survey The retail sales index showed a decline from +5 to -10 in May, but the outlook is optimistic
BRC shop price index Accelerated from 8.8% to 9.0% yoy in May to reflect stronger pace of retail inflation
S&P Global/CIPS UK Manufacturing PMI For the month of May: 47.1 (the lowest level in four months), compared to 47.8 previously
S&P Global/CIPS UK Construction PMI In May: 51.6 compared to 51.1 in April; While costs are still rising, May had the weakest inflation rate in about two-and-a-half years
S&P Global/CIPS UK PMI Services For the month of May: 55.2 compared to 55.9 in April; “Wage pressures push cost inflation to a three-month high”
BRC: UK Retail Sales It slowed from 5.2% to a seven-month low of 3.7% in May as shoppers cut back on non-essential spending amid soaring food prices.
Demands matter Decreased by 13.6K instead of an estimated rise in the unemployment rate of 21.4K in May, as the previous reading was revised to show a smaller increase of 23.4K in the initially reported unemployment rate of 46.7K.
retail It slowed from 0.5%m/m to 0.3%m/m in May (versus -0.2%m/m expected) thanks in part to warm weather boosting out-of-store retail activity
Mortgage approvals For the month of May: 50.5 thousand compared to 49 thousand previously; Net consumer credit to individuals: £1.1 billion vs. £1.5 billion previously
Previous issues and the impact of environmental risks on the pound sterling
June 14, 2023
Overlays GBP against major currencies chart on TV Graphics by TV
Event Results/Price Action: As expected, the economy grew by 0.2% from March to April. The services sector, which had been a drag in March, rose 0.3% in April. Annual growth also improved from 0.3% to 0.5%, which was mostly in line with market estimates.
As in the May edition, Sterling did not have a noticeable reaction during the release of the report. However, the improvement in GDP likely contributed to the pound rally during the London session until other headlines related to the US session inspired choppy price action in the pound towards the end of the day.
Risk Environment and Internal Market Behaviors: The Fed’s talks about stopping its risk-tightening earlier in the week supported the Fed. Unfortunately, concerns about the outlook for crude oil demand and downbeat China data limited gains for higher-yielding bets. If it weren’t for the currency’s bullish data surprises, more higher-yielding currencies would end the week lower against the greenback.
May 12, 2023
Overlays GBP against major currencies chart on TV Graphics by TV
Event Results/Price Action: Heavy rains and strikes managed to help shrink the UK economy by 0.3% from February to March, which was weaker than the flat reading markets had expected.
Annual growth managed to post gains of 0.3%, while a 0.1% rise in the first quarter beat the Bank of England’s estimate of 0.0%.
The British pound showed little initial reaction to the report. However, the GDP loss, which followed the Bank of England’s rate hike the day before, helped pull the pound down from its intraday highs against the US dollar, Swiss franc and Canadian dollar.
Risk Environment and Internal Market Behaviors: With the US debt ceiling deadline, US CPI release, China CPI and trade data under the spotlight, risk aversion and US dollar buying were the headlines that week.
Other major currencies such as the British Pound had a volatile week, which ended with the currency trading mostly lower against the safe havens.
Price action odds:
Possibilities of feeling risky: Market sentiment on Thursday is likely to be mainly affected by the US CPI update on Wednesday. The odds are in favor of another slowdown in the US inflation reading which is likely to fuel risk sentiment broadly, especially if risk-off flows dominate on Wednesday ahead of the CPI report.
RBNZ and BoC policy will also be announced ahead of the UK GDP event, which could paint a clearer picture of the direction with the biases of the major central banks and how markets feel about risk before we see the UK GDP report.
Scenarios for the British pound:
Base case: Based on weaker business surveys and retail sales data, the UK could see a slower growth reading of 0.2% m/m in April.
As with the last two releases, we don’t expect big fireworks right after the actual release. With GDP expected to miss, this could weigh on the pound as the Bank of England is likely to factor slower growth further into their calculations, especially if UK production reports due to be released at the same time as the missed GDP report also.
Attitude before the report may also be a factor; If the pound picks up a bid before the event, the odds are high that fund traders will take some longs off the table if a weaker-than-expected print hits the wire. Drawing in new shorts isn’t a likely scenario without a really weak GDP reading, but that’s something to think about as well.
In the above scenario, it is likely that we will see weakness in the short term GBP against recently hawkish central bank currencies such as the US dollar, the euro and the Swiss franc, especially if the US CPI raises risk sentiment broadly.
Alternative scenario: The stronger-than-expected monthly GDP report keeps the Bank of England more focused on combating high inflation with less regard for slowing economic growth. This could attract sterling bulls in the short term, with the odds increasing if sterling falls ahead of the UK GDP release.
The odds of a successful short-term upward move are likely to rise against currencies with pessimistic (or pessimistic recently) central banks such as the Japanese yen (especially if broad risk sentiment prevails), and possibly the New Zealand and Canadian dollars if their central banks turn dovish this week.