GBP/USD: Is the UK Headed For Recession? Q2 GDP Will Tell Us on Friday

Economic expansion in the UK is anticipated to slow significantly during Q2 to match a three-year low of 1.6 percent, down from 2.3 percent in Q1. If anything, the odds are in favor of a more dramatic slowing.

                                    [B]JUL 25[/B]
                                   [B]UK[/B][B] GDP (2Q A) (QoQ) (08:30 GMT; 04:30 EST)[/B]
                                   [B]UK[/B][B] GDP (2Q A) (YoY) (08:30 GMT; 04:30 EST)[/B]
                                                     
                                   [B]Expected:                             0.2%[/B]
                                   [B]Expected:                            1.6%[/B]
                                                     
                                   [B]Previous:                              0.3%[/B]
                                   [B]Previous:                             2.3%[/B]
                         [B]What Are The Markets Facing?[/B]

Economic expansion in the UK is anticipated to slow significantly during Q2 to match a three-year low of 1.6 percent, down from 2.3 percent in Q1. If anything, the odds are in favor of a more dramatic slowing. Indeed, the most recent PMI surveys showed a broad deterioration throughout the economy, as the manufacturing and services indexes both fell below 50 (signaling a contraction in business activity) in May and slipped even lower in June to 45.8 and 47.1, respectively. Meanwhile, conditions in the construction sector are unequivocally dismal, as the segment’s PMI report started to signal contraction in March, and fell at the fastest pace in at least 11 years in June to a reading of 38.8 from 43.9. Likewise, as property supplies outstrip demand by a large margin and lending standards tighten, Rightmove home prices have fallen negative during 7 of the past 12 months, which have only dimmed already-weak growth prospects. As a result, the news could lead the markets to cut back expectations that the Bank of England will consider raising interest rates before year-end, as the downside risks to growth loom too large.

What else could move the markets this week? Find out the Top 5 Events you should be watching.

Bonds – Long Gilt Futures

Long Gilt futures have bounced from trendline support this week, but the upcoming release of UK GDP for Q2 could decide the contract’s next move. Indeed, if GDP proves to be surprisingly strong, Gilts could fall back toward trendline support near 105. On the other hand, a slowing in UK economic expansion that matches or is worse than forecasts could propel Gilts higher to target 107…

FX – GBP/USD

GBP/USD continues to hold within a rising channel, though the pair plummeted toward trendline support at 1.9856 on Thursday following the release of disappointing UK retail sales. Upcoming event risk includes the release of UK GDP for Q2, which is anticipated to show a marked slowdown in growth. If the figures fall in line with or more than expectations, GBP/USD could drop for a test of at least the 50 SMA at 1.9770 and 100 SMA at 1.9805, as the news will raise the odds that the Bank of England will consider cutting interest rates within the next few months. On the other hand, a surprisingly strong reading could propel the pair higher, keeping price within the channel to target 1.99.

Where will the British pound go next? Discuss the topic with other traders in the GBP/USD Forum.

Equities – FTSE 100 Index

The FTSE 100 has managed to hold above support at 5,350, but the index could break below on Friday as UK GDO for Q2 is anticipated to reflect a sharp slowing, adding to evidence that the UK economy may be headed for recession. The news will likely be bearish for UK equities, as the country’s financial markets are already unstable and deteriorating economic conditions certainly will not help. As a result, the FTSE 100 may tumble toward falling trendline support at 5,300. However, if the news is surprisingly strong, the FTSE 100 could resume its rally to target the weekly highs near 5,460.

Written by Terri Belkas, Currency Analyst for DailyFX.com

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