UK GDP Preview: Brexit may hit the data hard, two days before the (hard?) exit

The United Kingdom publishes its Gross Domestic Product report for February on Wednesday, April 10th, at 8:30 GMT.

The British economy is doing well, especially in comparison to the dark warnings ahead of the EU Referendum. In 2017, the UK underperformed the euro-zone, but in 2018 the differences were less notable. 

And even in January, the UK economy looked good with a monthly growth rate of 0.5%. This time, expectations stand at 0%: totally flat. The global economy is to blame for these lower expectations. Data from China, the euro-zone, and also the US all point to a slowdown and the UK cannot avoid it.

And then there's Brexit. Q1 saw repeated failed attempts to pass the Brexit deal that May reached with the EU. As time passed by without a breakthrough, businesses and consumers took note. Stockpiling may have caused an upturn in the economy, but the dearth of investment and the general caution probably took their toll.

And Brexit plays a role in the reaction as well.

GBP/USD potential reaction

The data is released hours before UK PM Theresa May will meet her European counterparts in the special EU Summit on Brexit. The April 10th Summit comes only two days before the UK is set to leave the EU. The default option is for a hard Brexit. An extension is on the cards, but May requested only a short one running until June 30th.

Leaders will try thrash out a new accord and any headline related to the EU Summit and the next steps in Brexit could have a substantial impact. 

Since Britain began releasing monthly reports on GDP growth, there has been a clear differentiation between the profound impact of quarterly reports and the more modest response of monthly ones. In addition, there is the aforementioned EU Summit.

So, we can expect a short-lived reaction.

Scenarios

However, if the economy contracted in February and as the forward-looking numbers for March look bleak as well, fears of a recession could trigger a more significant response, even if for a short time.

The more likely scenario is of 0% or 0.1% growth in February. In this case, GBP/USD could pick up just a bit before it returns to the range, waiting for the next Brexit headline.

In the unlikely scenario that GDP beats expectations with 0.2% or more, GBP/USD has room to the upside, but once again, only for a while. Markets know that the Bank of England would like to raise rates, but if and only if Brexit uncertainty is resolved. A short extension will not cut it.

Conclusion

UK GDP will likely have a temporary effect on GBP/USD given the focus on Brexit. However, an outright contraction, related to the Brexit impasse, has the potential to weigh on Sterling.