UK: First GDP report following the Brexit vote in focus - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the release of the latest GDP report from the UK will also be in focus in the week ahead.

Key Quotes

“The GDP report for Q3 will provide further insight into how the UK economy has performed following the Brexit vote in June. Heading into the referendum the UK economy was surprisingly gaining upward momentum expanding by 0.7% in Q2. It provided a better than expected hand off for growth in the third quarter. The monthly data has revealed that growth likely weakened initially following the Brexit vote but has since regained its poise as the initial negative shock faded. It makes it harder to forecast the performance of the economy for the quarter as a whole.

The consensus expectation amongst UK economists is for growth to have moderated to an expansion of 0.3% in Q3. The risks appear skewed to the upside as the latest UK data flow has surprised strongly to the upside. A stronger report could offer some support for the pound although stronger data flow has had little positive impact so far.

The pound is likely to be far more sensitive to a downside surprise which would reinforce negative sentiment towards the pound. The BoE’s staff recently upgraded their forecast for GDP growth in Q3 to 0.2%. A similar reading or weaker could reheighten recession concerns and reinforce expectations that the BoE will deliver another rate cut by year end weighing more heavily on the pound.

If the pound is to rebound more strongly in the week ahead it will require the impending UK court ruling to come out in favour of giving parliament a vote in triggering Article 50. There is no specific data scheduled for the final decision but it could come as early as this week. The judges stated last Tuesday that they would come to a final decision as quickly as possible.”