Home Economy How U.K. GDP data could yank the pound back down to $1.26

How U.K. GDP data could yank the pound back down to $1.26

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         How U.K. GDP data could yank the pound back down to $1.26

The first snapshot of the U.K. economy’s health this year will test the strength of the pound, which has been making headway recently after plunging in the immediate aftermath of the Brexit vote.

Due Friday, the first-quarter report on gross domestic product is expected to show the slowest pace of growth in a year, highlighting that British shoppers are feeling the pinch from rising prices.

“Consumers seem to be feeling the adverse effects of the post-referendum drop in the exchange rate, given that it’s pushed up import prices. We are seeing prices on the High Street rising quite sharply,” particularly food and fuel prices, said Ruth Gregory, U.K. economist at Capital Economics.

Capital Economics expects the U.K economy grew 0.5% in the quarter, while the consensus estimate from FactSet is for a 0.4% rise in GDP. Either would be a deceleration from the 0.7% official reading for the previous quarter, and the slowest pace since 0.2% in the first quarter of 2016.

The first-quarter GDP report is due at 9:30 a.m. London time, or 4:30 a.m. Eastern Time Friday. Growth year-over-year is estimated to come in at 2.2%.

Prices have come under pressure since the pound

GBPUSD, +0.3735%

fell sharply after the June referendum, in which voters backed the withdrawal of the U.K. from the European Union. Sterling has recovered from its lowest levels, but it’s still down roughly 15% against the greenback, given it was at about $1.50 just before the vote.

Read: Brexit-driven pound slide boosts U.K. exports

In recent days, sterling has found a footing at six-month highs against the U.S. dollar, showing resilience at around $1.28. That leaves investors eyeing the next big level for the U.K. currency: $1.30. It’s a level last visited in early October, according to FactSet data.

“The buyers at these kind of elevated levels in the short term will need a good reason to add to their existing long positions here. We need strong data to lift it to $1.30,” said Fawad Razaqzada, technical analyst at Forex.com.

“Otherwise, it’s very likely, in my view, that it will come down first, before it eventually takes off again,” he added.

Depending on where sterling trades ahead of the GDP report, a significant miss could yank the pound below a support level of $1.2770, said Razaqzada.

“Fundamentally, the dollar remains supported because of a hawkish central bank, and with President Donald Trump [pushing for] fiscal spending, that should help the dollar and weigh on the pound,” he noted.

A drop in retail sales in March stands to weigh on GDP, likely shaving off about 0.15% off the reading, said Gregory at Capital Economics. And in the same month, average store prices rose by 3.3% on the year, the fastest growth since March 2012, according to ONS.

Retail sales, while under pressure, only account for about one-third of household spending. Recent evidence of other areas of spending, such as at hotels, restaurants, pubs and for leisure activities, have been a bit more encouraging, she said.

But ultimately, it’s the underlying data in Friday’s GDP update that is going to be important, said Craig Erlam, analyst at OANDA, of Friday’s report.

“What impact has inflation has on consumer appetite? Are we will still being supported by the services sector? Are we doing O.K., and are we expecting this to continue for the foreseeable future? That’s going to be the most important thing, rather than one single number,” he said

Even so, a poor GDP report could pull sterling to $1.26 over the coming weeks, according to Erlam.

“The $1.2850 to $1.29 level is going to be a tough level to crack, so should we see better data and we crack that level, that would be a very positive sign,” he said, and that could pave the way for sterling to tackle $1.33.

For the first time since October, the pound moved above $1.28 last week, after U.K. Prime Minister Theresa May surprised markets by calling a snap general election on June 8.

See: Why does Theresa May want a ‘snap election’ ?

Also read: Snap election ‘virtually rules out’ U.K. staying in EU’s single market

“The election is the primary thing on people’s mind right now. That’s what got us up to these levels. I don’t think we’re going to get this extraordinary performance in economic data, but I also don’t think we’re going to see this massive deterioration, either,” Erlam said.

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