UK GDP Preview: High chance of less than expected drop opens the door to gains for GBP/USD

Economists expect a contraction of over 20% in the UK’s economic output in Q2. However, there are three reasons to expect a better outcome. In that case, GBP/USD is set to rise, according to FXStreet’s analyst Yohay Elam.

Key quotes

“Gross Domestic Product is set to fall by 20.2% after edging 2.2% lower in the first three months of the year.”

“Britain’s contraction in the first quarter was relatively moderate in the first quarter, and that may lead to catching on with a sharper squeeze in the spring. However, the UK’s early resilience may repeat itself – that argument goes both ways.” 

“May’s increase came amid the gradual reopening of the economy, which began early that month. That removal of restrictions continued in June. While Britain’s relaxation of rules was slow and accompanied by local lockdowns, the trend was of reopening. There is a high probability that output expand in June – further softening April’s downfall and pushing quarterly contraction below that 20% mark.” 

“UK job figures for June were robust – showing the unemployment rate remained at 3.9%. That resilience of the labor market is a result of the government’s successful furlough scheme. That cash pushed consumption higher, as seen in year over year retail sales.”

“UK second-quarter GDP likely dropped, confirming a recession – yet probably not by around 20%. A beat may boost the pound, yet expectations may have already been adjusted. A surprising fall of over 20% would send sterling lower.”