Despite the ongoing Brexit drama, Friday is expected to be a good day for the British economy as flash GDP growth for the first quarter of the year, industrial output and trade balance figures are all awaited to show improvement at 0830 GMT. The move in sterling, however, is still heavily dependent on the progress of the UK-EU negotiations and even if the data surprise to the upside, sterling could only gain temporarily unless the sides resolve their differences; a scenario regarded unlikely at the moment.
What to expect from GDP growth numbers?
The first quarter of the year could be described fruitful for the UK as the consumer-dependent economy witnessed a strong rebound in core retail sales and a further reduction in the unemployment rate. Wage growth held at decade highs and above the inflation rate which continued to slow below the Bank of England’s (BoE) 2.0% price target, raising speculation that demand could advance in coming months.
On the business side, the Brexit deadlock may have probably forced companies to bring purchases and orders forward at the start of the year amid rising fears that the government would potentially leave the bloc without a deal and costs for shipments would go up as the previous deadline of March 29 was nearing. As such, industrial production could have been larger in March as forecasts suggest, recording a yearly growth of 0.5% in March versus 0.1% in the preceding month, while the trade deficit may have also narrowed from £14.11bn to £13.8bn. Recall that British exports and imports with the EU jumped to decade-highs in the three months to February.
Putting the above pieces together, stronger GDP growth in Q1 could be expected even under the cloud of Brexit uncertainty. Particularly, preliminary estimates suggest that the quarterly expansion quickened from 0.2% to 0.5%, while compared to the same quarter a year ago, growth is said to have surged by 0.4 percentage points to 1.8%, the fastest since Q1 2017.
What does the BoE believe about growth?
The BoE anticipates GDP growth to heat up in the corresponding period as well but is also aware that the timing of the UK withdrawal from the EU and the type of the exit agreement are important for a more lasting expansion, admitting that its projections are relying on a soft Brexit scenario.
Currently, developments around the topic are pointing to a harder Brexit as the talks between the Conservative UK Prime Minister, Theresa May, and the rival Labor leader Jeremy Corbyn, which entered the sixth week, have so far proved ineffective to lead towards a compromise, especially on the shape of the customs union, making a breakthrough unlikely this week. Complicating the picture, the two major parties lost significant public support in the local elections last week, reducing their chances for a strong showing in the European Parliamentary elections on May 23-26.
How could the pound react?
GBP/USD could recoup this week’s losses against the dollar if the figures beat expectations but the rally is believed to be temporary and contained within the 1.31-1.32 area as long as the Brexit issue remains unresolved. This also reduces the chances for a rate hike this year despite the words of BoE Governor, Mark Carney saying that markets are underestimating future rate rises. Friday’s peak of 1.3175 for GBP/USD could act as a decent resistance in this case.
Otherwise, a smaller-than-expected pickup in GDP growth could push the pair down to the 1.30-1.2920 key area.
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