GBP/USD has room to rise on weak GDP expectations

• The UK is projected to announce an unimpressive growth rate of 0.2% in Q1.
• The low expectations are based on Brexit uncertainty.
• A minor surprise could provide the spark for a GBP/USD recovery.

How hard has Brexit uncertainty hit the UK economy? Economists believe that it had a substantial adverse impact on growth, and this explains the low expectations.

The FXStreet economic calendar shows that forecasts stand at 0.2% QoQ and 1.4% in Q1 2019, identical to the outcome in Q4 2018 and weak numbers in absolute terms.

During the first quarter of 2019, the British parliament voted down May’s Brexit deal three times and also rejected other alternatives. The raging public debate took over the news and the March 29th deadline was looming over businesses and households alike. The gloom was reflected in surveys. The purchasing managers’ indicators for March were already mostly in contraction territory, indicating the economy had all but ground to a halt.

Yet apart from the soft, forward-looking data, the hard data was not so devastating. Retail sales rose by 1.1% in March, on top of 0.6% in February and 0.9% in January. UK shoppers played their role in boosting the economy as consumption was made easier by falling unemployment and rising wages, which hit an annual growth rate of 3.5% YoY in March.

And what about production? It was not too bad according to data for February and January, which both showed increases of around 1%.

GBP/USD has room to rise?

All in all, the gloomy mood is not reflected in the data we have so far. So, a growth rate of 0.3% or 0.4% QoQ cannot be ruled out. Moreover, the euro-zone reported an expansion of 0.4% last quarter, double the 0.2% level both the currency bloc and the UK saw in Q4. Brexit has not happened yet, and the economies are tied together.

If GDP growth comes out above expectations, GBP/USD has room to rise. Cable has already paid the price for the impasse in both cross-party Brexit talks and trade negotiations between the US and China and may just need a spark to bounce back to previous levels.

In the less likely case that growth slows down to 0.1% QoQ or goes flat, GBP/USD may continue struggling, with gloomy headlines continuing to push the pound lower for longer. However, it seems that an upside surprise is more likely than a downside one.

The UK quarterly GDP data is published on Friday, May 10th, at 8:30 GMT alongside its main components: manufacturing production, construction output, and others.