UK GDP Preview: Contraction to trigger correction? Sterling set for a reality check

  • The UK is projected to report a 1.7% contraction in the first quarter. 
  • Optimism about a vaccine-led recovery from the second quarter onward is baked into the price.
  • A reminder of past weakness may trigger a much-needed correction after the big breakout.

Flowers are blossoming, birds are chirping and Brits can finally do more activity as restrictions are gradually lifted. That is one of the reasons for the pound's massive rally above 1.40.

While Britain's successful vaccination campaign kicked off already in December, the economy still struggled in the first quarter of 2021 – and Gross Domestic Product figures for that period may trigger some sterling selling, 

Prime Minister Boris Johnson has been enjoying his party's success in local and regional elections – another pound-booster – but in early January, he put the country into lockdown. The B.1.1.7 COVID-19 variant, also known as the Kent or British strain, raged through the country.

The government took the first steps to exit these measures only in early March, and that is why economists expect economic output to drop by 1.7% quarterly. It is essential to note that these estimates are based on monthly GDP figures for January and February, thus including the worst period.

While the three previous publications have surprised to the upside, they have been minimal. Moreover, market participants have already learned that the impact of the new lockdowns was relatively moderate in comparison to that of the first shuttering. All this implies that the chance of an upside surprise is minimal.

The comeback from the lockdown and massive US fiscal stimulus have likely boosted the economy in the second quarter or even beforehand. Monthly data for March, released alongside the quarterly statistic, could already turn positive. Nevertheless, there is room for correction in GBP/USD. 

Cable correction

Apart from the recovery, and UK politics, cable also climbed in response to America's bitterly disappointing Nonfarm Payrolls data. The sell-off in the dollar has gone far and may see a pullback. With GBP/USD already stretched – the Relative Strength Index (RSI) is at overbought territory on some timeframes – the GDP report could trigger a downfall.

It would probably take a substantial beat of expectations to add fuel to sterling's rally. If the economy contracted by only 1%, or shocks by growing in the first quarter, the pound could rise. Conversely, a squeeze of over 2% or 2.5% would result in a more significant downside correction. 

Apart from showing markets that Britain struggled with the lockdown, the data could also serve as a reminder of Brexit. The UK's EU exit has been causing additional paperwork for goods and also has also left unresolved issues. Growth figures would serve as a reminder and as a reality check of these lingering issues. 

Will any such slide serve as a change of course or only a correction? As markets are forward-looking and the future looks brighter, a temporary dip is more likely than a long-lasting downfall. 


The UK is set to report a contraction of 1.7% in its output in the first quarter, due to its lockdown and also Brexit. The data may trigger a much-needed correction in GBP/USD.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD: ECB’s Lagarde may add to EUR weakness

The American dollar kept rising, heading into the weekly close, with EUR/USD bottoming on Friday at 1.1846 and settling at around 1.1860. On Monday, the focus will be on ECB President Christine Lagarde. EUR/USD maintains its bearish stance despite extreme oversold conditions.


GBP/USD: Delta variant hurting the pound

The GBP/USD pair traded as low as 1.3791, its lowest since mid-April, ending the week a couple of pips above such a level. The Bank of England is having a monetary policy meeting this week. GBP/USD extremely oversold but bearish in the near-term.


GBP/USD: Delta variant hurting the pound

The GBP/USD pair traded as low as 1.3791, its lowest since mid-April, ending the week a couple of pips above such a level. The Bank of England is having a monetary policy meeting this week. GBP/USD extremely oversold but bearish in the near-term.


Ripple fears of a major decline are unwarranted

XRP price remains locked in a range between the psychologically important $1.00 and the neckline of a multi-year inverse head-and-shoulders pattern at $0.76. However, a lack of technical clues leaves frothy forecasts on the sideline until directional confirmation can be gleaned from the charts.

Read more

Where next for markets after the Fed shocker

The Fed surprised markets with an abrupt hawkish shift that has triggered substantial volatility in currency markets. Valeria Bednarik and Yohay Elam explain the surprise, discuss technical level, the next moves in FX and beyond.

Read more