UK GDP Preview: Economists Expect A Contraction, But Outcome May Be Better


Tomorrow at 6 am GMT, the UK preliminary GDP report will be released. Market analysts and economists are predicting a contraction of the UK economy by 20.5% for the 2nd quarter of 2020. The previous quarter saw a drop of 2%, but the coronavirus hit and all that came with it as well, prompting the expectations of a steep decline in economic activity in the country. These projections are not unexpected, as the UK economy still struggles to recover from the lingering effects of the coronavirus epidemic in the country. Twenty-nine towns remain on the UK government watch list for a potential explosion in the number of coronavirus cases. 

The UK economy has proven quite resilient in the face of coronavirus-related challenges. There was a better concert among government agencies in terms of defining and implementing control measures, and the increase in coronavirus cases in May came with a phased reopening of the economy. The outbreak in the UK has mostly flattened out in many areas, prompting further easing in June and July. The effects of increased economic activity in June may cushion the devastating effects of the coronavirus on the UK economy felt in April and May. 

Employment data in the UK have also not been as downbeat as expected. The unemployment rate has remained stagnant at 3.9%, while the Claimant Count Change numbers improved in June when compared to May’s figures. 

The furlough scheme of the UK government has also proven to be a stop-gap measure of immense benefit, helping businesses to hold on to staff that would ordinarily have hit the labour market. The scheme also helped to boost retail sales, as consumers were more empowered to spend money and keep the retail market afloat, unlike the situation in the US where the retail industry has mostly suffered. 

Trade Expectations and Outlook for GBPUSD

The GBPUSD is the currency pair of choice for trading this news release. A negative GDP reading which is better than the -20.5% projected by the market would be GBP +ve, helping it to maintain the traction it has had over the US Dollar in the last several weeks. This would probably produce a muted upside move on the pair as the markets have already priced in a lot of USD weakness into price action. There is a resistance at 1.31754, which is not too far ahead of current price levels at 1.30960. Any upside response to the news has to break this resistance so that the doorway towards 1.33193 and beyond, would be opened. 

On the flip side, a fall that exceeds -20.5% by more than five basis points would be deemed as GBP -ve. This would probably create an opportunity for profit-takers to hit their trading platforms, and the selling that could ensue could drive the GBPUSD lower, targeting a breach of the crucial 1.29932 support. If this is successful, 1.28589 could become a viable target, with 1.27558 and 1.26374 lining up as potential successors to this downside target. 

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