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Firm UK GDP Data Wednesday to Assure Nov 2 Rate Increase

Firm UK GDP Data Wednesday to Assure Nov 2 Rate Increase

Martin Essex, MSTA, Analyst

Talking Points

- Third-quarter UK GDP data Wednesday are expected to show economic growth of 0.3% quarter/quarter; 1.5% year/year; both unchanged from Q2.

- That would likely persuade the Bank of England to double UK Bank Rate to 0.5% on November 2, firmly underpinning the British Pound.

What Does the Fourth Quarter Hold for the Pound, Equities, Oil and Other Key Markets? Find out here

UK third-quarter economic growth figures to be released Wednesday are likely to persuade the Bank of England’s monetary policy committee not to delay before doubling UK Bank Rate to 0.5%. GDP growth is expected to be unchanged from the second quarter at 0.3% quarter/quarter and 1.5% year/year, high enough to convince the MPC to increase the benchmark UK interest rate on November 2.

Such a move would be no surprise – the markets are pricing in a probability of around 80% that the rate will be raised – but should still underpin the British Pound despite the tortuous negotiations towards Brexit that are continuing to sour sentiment towards it.

November 2 is a “Super Thursday” in the UK, when the rate announcement is accompanied by the publication of the meeting minutes and of the quarterly Inflation Report. That will likely point to a decrease in inflation in the months to come from the current 3% but not quickly enough to bring it down to the 2% target without a Bank Rate increase.

I’ll be covering the GDP data live in a webinar starting at 0815 GMT tomorrow. You can sign up for it here

As is often the case in the UK, the decision will not be easy because of high inflation accompanied by anemic growth. However, GDP expansion of 1.5% would probably be considered good enough to allow for the first UK rate increase in more than 10 years given the current low level of British unemployment.

That would focus attention on the following news conference by Bank of England Governor Mark Carney, and in particular on whether he drops any hints that rates could be raised further next year. If growth continues to expand and inflation fails to fall, another three hikes next year are quite possible and would certainly give the Pound a lift after its decline against the US Dollar since late September.

Chart: GBP/USD Daily Timeframe (2017 to Date)

Firm UK GDP Data Wednesday to Assure Nov 2 Rate Increase

Chart by IG

An initial target would then be the 1.35 “round number”, followed by the 1.3656 September high.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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