UK GDP Preview: Stagnation may be good enough for pound bulls, three GBP/USD scenarios


  • Economists expect the UK to report stagnation in the fourth quarter of 2019.
  • After several days under pressure, sterling may recover, especially if the economy ticks up.
  • Outright recession risk may push the pound lower.

Standing in the same place usually means eventually falling behind – but that may not be the case for the pound in response to zero growth. There are two reasons why sterling may shine while Gross Domestic Product stagnate, as economists expect for last year's final quarter.

Things have changed since Q4 2019

The autumn of 2019 was a time of turbulence and high uncertainty. In early October, fear of a no-deal Brexit was real as the EU and the UK were apart on critical topics such as the Irish backstop. After Prime Minister Boris Johnson struck an agreement with Brussels, he still had a hard time in parliament, and the country went to the polls.

A clearer path on Brexit emerged only towards the end of the quarter – after the elections in mid-December. This uncertainty took its toll on the economy as businesses deferred decisions. Post-elections Purchasing Managers' Indexes from January already showed a return to confidence. Investors may, therefore, see the GDP figures as stale – even though they represent actual figures rather than the only sentiment. 

GBP/USD has already fallen

Brexit is far from over – while the UK officially left on January 31, it retains most rights and obligations during the transition period, which expires at year-end. Talks about future relations with the EU begin only in March, but the battle lines have been drawn, and they mark stark differences in the approach of both sides.

If the UK leaves without a deal, it will default to World Trade Organization rules, which means barriers to commerce. Moreover, reports from Brussels suggest that the EU may try to curb London's financial services sector – and hurting the crown jewel of the economy is also worrying. 

The pound has already responded to these fears – GBP/USD has dropped to the lowest since November. A figure that does not scream "recession" may be sufficient to trigger a recovery in sterling.

GBP USD recent movements ahead of UK GDP February 11

All in all, the wind may blow in favor of cable bulls. 

Here are three scenarios

1) Stagnation – GBP/USD advances

As explained earlier, the mix of a figure from the turbulent past – even if it is from the recent past – and somewhat oversold conditions may trigger a recovery. While gains could be limited, the outlook is positive.

This scenario has a high probability. Since the UK began publishing monthly GDP figures, economists' expectations have become more precise. 

Surprises are uncommon and limited:

UK GDP consensus and results deviation

2) Contraction – GBP/USD edges lower

The economy squeezed by 0.3% in November, and retail sales figures for December were depressing. If these add up to an economic squeeze, the pound may suffer. It takes two consecutive quarters of contraction to define a recession, and fears of an outright downturn may weigh on sterling.

However, it is essential to note that a decline of 0.1% would not be devastating. It would probably take a drop of 0.2% or more in output to send the pound plummeting. 

The probability is medium due to the weak data from November. 

3) Growth – GBP/USD shoots higher

With expectations standing at 0%, a minimal beat would be sufficient to extend the UK economy's growth and diminish fears of a recession.

The probability is low, and such an outcome – even a meager 0.1% expansion – would trigger a jump in the pound. 

Conclusion

UK quarterly GDP provides an in-depth look at a time when things looked much worse. The higher level of uncertainty and recent pound pressure may result in a bounce if low expectations for zero growth are met. A drop in the economy's output could weigh on the pound while surprising growth could trigger a rally. 

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.

Recommended Content


Recommended Content

Editors’ Picks

USD/JPY jumps above 156.00 on BoJ's steady policy

USD/JPY jumps above 156.00 on BoJ's steady policy

USD/JPY has come under intense buying pressure, surging past 156.00 after the Bank of Japan kept the key rate unchanged but tweaked its policy statement. The BoJ maintained its fiscal year 2024 and 2025 core inflation forecasts, disappointing the Japanese Yen buyers. 

USD/JPY News

AUD/USD consolidates gains above 0.6500 after Australian PPI data

AUD/USD consolidates gains above 0.6500 after Australian PPI data

AUD/USD is consolidating gains above 0.6500 in Asian trading on Friday. The pair capitalizes on an annual increase in Australian PPI data. Meanwhile, a softer US Dollar and improving market mood also underpin the Aussie ahead of the US PCE inflation data. 

AUD/USD News

Gold price flatlines as traders look to US PCE Price Index for some meaningful impetus

Gold price flatlines as traders look to US PCE Price Index for some meaningful impetus

Gold price lacks any firm intraday direction and is influenced by a combination of diverging forces. The weaker US GDP print and a rise in US inflation benefit the metal amid subdued USD demand. Hawkish Fed expectations cap the upside as traders await the release of the US PCE Price Index.

Gold News

Stripe looks to bring back crypto payments as stablecoin market cap hits all-time high

Stripe looks to bring back crypto payments as stablecoin market cap hits all-time high

Stripe announced on Thursday that it would add support for USDC stablecoin, as the stablecoin market exploded in March, according to reports by Cryptocompare.

Read more

US economy: Slower growth with stronger inflation

US economy: Slower growth with stronger inflation

The US Dollar strengthened, and stocks fell after statistical data from the US. The focus was on the preliminary estimate of GDP for the first quarter. Annualised quarterly growth came in at just 1.6%, down from the 2.5% and 3.4% previously forecast.

Read more

Majors

Cryptocurrencies

Signatures