UK GDP Estimate Report Delivered Mixed Results to Test the BoE

It was a busy start to the Wednesday session on the UK economic calendar. After Tuesday’s better-than-expected Labour Market Overview Report, the markets shifted focus to UK economic growth figures.

The UK GDP Report for April garnered plenty of interest, with a pickup in economic activity likely to fuel bets on a more hawkish Bank of England rate hike at the next MPC Meeting.

In April, the UK economy expanded by 0.2% versus a 0.3% contraction in March. Economists forecast growth of 0.2%. Year-over-year, the economy grew by 0.5% versus 0.3% in March. Economists forecast the UK economy to expand by 0.6%.

However, on a 3-monthly basis, the economy expanded by 0.1% versus growth of 0.1% in Q1. Economists forecast a contraction of 0.1%.

According to the Office for National Statistics,

• The services sector grew by 0.3% in April, recovering from a 0.5% decline in March.
• However, production output declined by 0.3% after rising by 0.7% in March. Manufacturing production weighed, falling by 0.3%.
• On a 3-monthly basis, services were a drag, falling by 0.1%, while construction and production grew by 0.2% and 1.6%, respectively.

Other stats included trade data that beat forecasts.

In April, the UK trade deficit narrowed from £16.36 billion to £15.00 billion versus a forecasted widening to £16.50 billion. The Non-EU trade deficit narrowed from £5.46 billion to £5.04 billion. Economists forecast a widening to £1.651 billion.

While the GDP estimates were unimpressive, the April figures could give the Bank of England scope to tackle wage growth and inflation more aggressively. However, more aggressive moves may also tip the UK economy into a recession.

GBP to USD Reaction to UK GDP Estimate

Ahead of the UK GDP Report, the GBP to USD. rose to an early high of $1.26177 before falling to a pre-stat low of $1.26011.

However, in response to the UK GDP Report, the GBP to USD fell to a post-stat low of $1.26018 before rising to a high of $1.26120.

This morning, the GBP/USD was down 0.02% to $1.26086.

Next Up

Looking ahead to the US session, it is a busy day on the US economic calendar. US wholesale inflation numbers will draw interest ahead of the Fed policy decision.

Softer-than-expected US wholesale inflation numbers should further ease pressure on the Fed to push interest rates higher.

The US CPI Report impacted market sentiment toward Fed interest rates on Tuesday.

According to the CME FedWatch Tool, bets on the Fed hiking rates by 25 basis points in June tumbled in response to the inflation numbers. The probability of a June 25-basis point interest rate hike fell from 20.9% to 4.6%, with the chances of a July 50-basis point interest rate hike falling from 14.0% to 2.9%.

However, the probability of a 25-basis point July hike increased from 59.9% to 60.9%.

While the inflation numbers will draw interest, the FOMC interest rate decision, economic projections, and press conference will be the focal points. A dovish pause would fuel a late GBP/USD rally, with the UK Labour Market Overview Report raising expectations of a hawkish BoE policy move.