Modest UK GDP uptick may strengthen BoE rate cut case | FXStreet
The UK’s Office for National Statistics (ONS) will release the advanced prints of the Q3 Gross Domestic Product (GDP) on Thursday. If the figures meet market consensus, the UK economy would have maintained its pace of expansion at 1.4% annualised, showing that momentum could have begun to stall. The QoQ report is expected to show a mild GDP growth of 0.2%.
At the Bank of England’s (BoE) latest gathering, the Monetary Policy Committee (MPC) anticipated the domestic economy to grow by 1.5% in the current year.
According to projections, the BoE could further lower its policy rate by an additional 25 basis points at its December 18 gathering, particularly following a cooling labour market and a loss of momentum in domestic inflation.
Projections for the UK GDP
The Office for National Statistics (ONS) reported that the UK economy expanded 0.3% QoQ in the second quarter, compared with the 0.7% gain posted in the January-March period. On a monthly basis, the UK GDP expanded by a meagre 0.1% in September and is expected to remain flat in October.
In its latest meeting, the BoE downgraded its forecast for economic growth and now expects GDP to expand by 0.2% in Q3 (from “around 0.4%” in September).
Regarding inflation, the UK’s Consumer Price Index (CPI) continues to rank among the highest within its major peers. As indicated by the most recent ONS report, in September, the headline CPI rose by 3.8% YoY, while the core print gained 3.5% YoY and 4.7% from services inflation.
When will the UK release Q3 GDP, and how could it affect GBP/USD?
The UK will release the preliminary Q3 Gross Domestic Product (GDP) on Thursday at 7:00 GMT.
Pablo Piovano, Senior Analyst at FXStreet, says, “GBP/USD’s current recovery appears to have met some decent hurdle around the 1.3200 region.”
“If bulls push harder, Cable could challenge its critical 200-day SMA in the 1.3270 region, prior to provisional barriers at its 55-day and 100-day SMA at 1.3382 and 1.3420, respectively. Further up comes the October top at 1.3527 (October 1), prior to the September ceiling at 1.3726 (September 17),” Piovano adds.
“On the flip side, the loss of the November base at 1.3010 (November 5) could see the next significant contention not before the April floor at 1.2707 (April 7),” he concludes.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.