What: The UK’s Q1 GDP report is released tomorrow at 0930 BST. “This is backward looking data” I hear you cry, however it is hotly anticipated by the market because of the chance of a triple dip recession. The market expects a 0.1% increase in GDP for the first quarter.
If the number is weaker than expected: The pound could decline sharply on the back of negative headlines about the triple-dip and the UK’s grim economic prospects. The government plans to stick to its austerity plans, which are blamed for weighing on UK growth, thus confirmation of a triple dip tomorrow would highlight the black hole the UK economy finds itself in with no way out. It could also boost expectations of a Japanese style-QE assault when Mark Carney takes the helm at the BOE in July, as tight fiscal policy combined with negative growth supports an aggressive stance by the BOE. This is pound negative in the short and medium-term.
If the number is stronger than expected: This would be a surprise, and could cause a short, sharp spike higher in the pound. However, even if we get 0.1%-0.2%GDP for last quarter it suggests that the UK economy is still skirting along the bottom, which is unlikely to support the pound in the medium-term.
Potential market moves:
On a weaker number: The pound has been one of the better performers on Wednesday and even today’s data disappointments including mortgage approvals and also the CBI retail sales report for April only knocked GBPUSD by 25-30 pips. This leaves GB P vulnerable to a sell off if we get weak GDP on Thursday. We think the pound should be weaker for some time. Confirmation of a triple-dip could weigh heavily on GBPUSD, in our view. Key support levels in the short term include 1.5195 – the 50-day sma, then 1.5135 – the base of the daily cloud. In the medium-term, weak growth could give the green light to more QE from the BOE, which opens the way for a re-test of the March lows at 1.4830. Below here gets tricky to predict, as short positions in pound futures held by the non-commercial market are close to their highest level since 1993 (according to the latest CFTC data), which suggests that there is already a lot of short interest in the pound, which may limit downside below the March lows we have already pointed out.
On a stronger number: Any relief rally on a stronger than expected GDP number on Thursday (which is unlikely in our view) could cause a sharp move higher, as it would be so unexpected by the market. 1.5425 is a key resistance level, the 38.2% retracement of the down move from January to March, which could thwart any short term rally.