Cooling UK GDP May Prompt BOE Rate Action

After significant signs of cooling in the UK labour market, traders are looking forward to further easing from the BOE as the British economy shows signs of slowing down.

Timing the Next Rate Cut

Traders were somewhat on Tuesday, which showed a larger decompression of the market than was predicted. Not only did the number of people receiving unemployment support rise suddenly, but wage growth also cooled. The reading is important given that the BOE will announce its rate decision next week, as markets are still trying to figure out whether the central bank will follow its European counterpart in the easing cycle. Thursday features the release of UK GDP figures from around the same period as the jobs numbers. If it shows that the British economy has started to slow down faster than projected, it could pressure the BOE to cut rates sooner than anticipated.

is already expected to prompt the BOE to ease rates at least two more times this year, according to the latest poll of economists by Reuters. They expect the next meeting to see a pause, with the next rate cut scheduled for August. Notably, the economists shared the same growth outlook as the government, expecting the economy to expand by 1.0% this year as compared to 1.1% a year ago.

The Surprises in the Data

UK GDP growth for April is expected to reverse course and contract by 0.1% compared to 0.2% growth in the final month of Q1. The British economy had been outperforming through the first three months of the year, but the are projected to reverse this trend in the second quarter. At the same time, the UK's trade balance is expected to remain largely unchanged, with industrial production expected to improve to -0.4% from -0.7%. 

UK Chancellor Rachel Reeves has pledged to tweak spending to boost the economy and is expected to provide an update for the annual budget on Wednesday. However, markets might be more focused on what the BOE will do, especially after Governor Andrew Bailey last week said that , although he stuck to the line of uncertainty. In the wake of the jobs numbers earlier this week, the market actually moved to price in one more rate cut this year. Even optimism on the trade front did not help support the GBPUSD over the last couple of days.

GBPUSD Under Pressure

Cable peaked at 1.3617 last week after the completion of a potential ending wedge pattern, falling through 1.35 to form a regional support at 1.3455. Losing the 1.3415 level, where the wedge pattern initiated, could see prices down at 1.3360, followed by 1.3250. To the upside, only reclaiming 1.35 and the swing high of 1.3536 would expose the peak in the follow-up toward 1.3581, with a failure increasing the odds of a consolidation.

Source: SpreadEx / GBPUSD

Key Takeaways

UK labour data revealed significant cooling on Tuesday, with increases in unemployment claims and slowing wage growth increasing the number of rate cuts by the BOE this year to two, ahead of the bank’s upcoming meeting. On Thursday, GDP figures are expected to show a 0.1% contraction in April, which could alter the timeline for the next cut if the numbers disappoint. While Reeves plans spending adjustments to stimulate growth, markets remain focused on the BOE after Bailey's comments on future rate cuts.