UK GDP Report Leaves BoE-Fueled UK Recession on the Table

Highlight

• After a quiet week, finalized UK GDP numbers were in focus this morning.
• UK GDP numbers were disappointing, with 0.1% quarterly growth putting the economy at risk of a BoE-fueled recession.
• However, the US Core PCE Price Index and personal spending numbers will have more impact on the markets later today.

It was a busy start to the day on the European economic calendar. After a quiet Monday through Thursday, finalized Q1 UK GDP garnered plenty of interest this morning.

The GDP numbers had to reflect a resilient UK economy to ease recessionary fears. However, there were no changes from prelim figures, with the UK economy expanding by a lackluster 0.1% in Q1.

According to the Office for National Statistics,

• UK growth was 0.5% below its pre-COVID-19 level.
• The services sector grew by 0.1%, with the construction sector expanding by 0.4%, down from a prelim 0.7%.
• There were also revisions to production sector growth. In Q1, the production sector grew by 0.1%, supported by an upward revision to manufacturing growth from 0.5% to 0.6%.
• Real household disposable income fell by 0.8% after rising by 1.3% in Q4.
• The household saving ratio stood at 8.7%, down from 9.3% in Q4.
• Notably, there was no growth in household expenditure versus 0.2% growth in Q4.

Year-on-year, the economy expanded by 0.2%, unchanged from prelim numbers but down from 0.6% in Q4.

The latest GDP numbers were underwhelming, leaving the UK economy at risk of a recession as the Bank of England combats persistent inflation.

On Wednesday, Bank of England Governor Andrew Bailey spoke at the ECB Central Bank Forum, saying,

“The cumulative data – both particularly on the labour market and on the inflation release we had, which showed to us clear signs of persistence – caused us to conclude that we had to make really quiet a strong move.”

GBP to USD Price Action

Ahead of the UK GDP Report, the GBP to USD fell to a pre-stat low of $1.26084 before rising to a high of $1.26357.

However, in response to the GDP numbers, the GBP to USD fell from $1.26297 to a post-stat low of $1.26144.

This morning, the GBP to USD was up 0.05% to $1.26184.

Next Up

With the UK GDP Report in focus, investors should track Monetary Policy Committee Member commentary throughout the day. However, no MPC members are on the calendar to speak today, leaving chatter with the media to move the dial.

Looking ahead to the US session, it is a busy US economic calendar. The all-important US Core PCE Price Index numbers are in focus. Sticky inflation or an unexpected pickup in US inflationary pressure would support Fed Chair Powell’s consecutive rate hike warning.

Other stats include personal spending/income and finalized consumer sentiment figures that need consideration. We expect the spending and income figures to garner more interest, however.

After Fed Chair Powell’s hawkish comments and the US economic indicators from Thursday, the markets cemented a July rate hike ahead of today’s inflation numbers. Investors also raised their bets on a September move.

According to the CME FedWatch Tool, the probability of a 25-basis point July Fed rate hike stood at 89.3% versus 81.8% on Wednesday. Significantly, the chances of the Fed lifting rates to 5.75% in September stood at 26.8%, up from 16.4% on Wednesday.