UK GDP Preview: Even a minor disappointment may weigh heavily on GBP/USD

• The UK economy has enjoyed robust growth in the first quarter due to stockpiling.
• Final GDP figures are expected to confirm the 0.5% quarterly growth rate.
• A downgrade to the annual figure may hurt the vulnerable pound.

Taking a deep look in the rearview mirror rarely rocks the pound in normal times – but these are not normal times. The final release of first-quarter Gross Domestic Product in the UK may be the last chance to see upbeat growth in some time. According to the previous data, the British economy grew by 0.5% on a quarterly basis – a robust rate by all means.

However, the rapid expansion was fueled by stockpiling ahead of the original Brexit data of March 29th – which was eventually postponed. Initial data read for the second quarter are worrying. UK output shrank by 0.4% in April and figures for May are far from satisfactory. 

But before we receive full data for the second quarter, the final figures for Q1 may still have an impact. Was growth genuinely that robust? Investors expect a confirmation of the 0.5% quarterly growth rate – as final QoQ numbers usually repeat the initial reads.

Negative surprise in yearly numbers?

However, annual numbers tend to provide surprises – and here the picture is bleaker. On an annual basis, the economy grew by a meager 1% according to the previous publications. 

A downside surprise in the yearly number may already have a significant impact on the pound. A sub-1% growth rate may create depressing headlines and weigh on the pound.

Moreover, Sterling is in a vulnerable position after Boris Johnson – the leading candidate to become PM – promised to leave the EU by October 31st "do or die." While he also noted that the chances of exiting without an accord are low, markets' fear of a cliff-edge Brexit has intensified. 

Also, the USD side of the GBP/USD equation may also push cable lower. The greenback enjoyed a comeback earlier this week as Fed officials seem to be settling for only one rate cut and not a series of slashes as markets had priced in.

The FXStreet Surprise Index for UK indicators is trending lower, also implying a downward surprise:

Other scenarios

In case both data points remain unchanged and meet investors' expectations, GBP/USD will likely trade choppily in the immediate aftermath but will remain unchanged. 

If GDP figures beat expectations by 0.1% – a scenario that cannot be ruled out – Sterling may edge up in the short-term but return to previous levels afterward. Fear of weak growth in the second quarter overshadows any minor improvement.

A long-term boost to GBP/USD seems possible only if the data beat by 0.2% or more – highly unlikely given past figures. 

Conclusion

The final UK GDP release for the first quarter of 2019 is expected to confirm robust growth based on pre-Brexit stockpiling. There is a significant chance of a downside surprise that may find a vulnerable pound. In case of an upside surprise, there is little room to the upside.