Will UK’s GDP Prove Recessionary?

The BOE has been warning that a recession is coming for months now, and tomorrow the data might come in to support that idea.
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It was a complicated quarter

Two consecutive quarters of negative growth are needed to meet the definition of a recession, which doesn't happen until the recession is well underway. The data coming out tomorrow might show the first of those two quarters to be negative for the UK. Q3 GDP growth is forecast at -0.5% compared to 0.2% prior.

Though the context is important; Q3 had an unprecedented political situation for the country. PM Johnson resigned, there was a somewhat calm period of election, and then the disaster of the now infamous "mini-budget". The BOE had to intervene to prevent a financial collapse, and a new PM and Chancellor had to take over. All of that would likely have left many investors wary about taking risks, which could momentarily slow down the economy. In fact, at the same time, the UK will report quarterly investment figures, which are expected to slow to 1.3% compared to 3.7% prior.

The market reaction

Of course, there is always the possibility of a surprise result. The market is already bracing for a negative growth result, which would be expected to generate more resistance in the BOE's hiking path. This creates a scenario where good news is bad news and vice versa.

Better than anticipated GDP figures could mean the BOE would hike more than expected, which could weigh on UK stocks but support the pound. In the reverse scenario, optimism might be short-lived as the markets still face uncertainty about what will be in the Autumn Budget. Rumours are that PM Sunak is considering another tax hike, which might help alleviate the fiscal issue, but not the inflation problem.

GBP/USD still in an uptrend, technically

Cable appears to trade within an ascending channel with both upper and lower trendlines in focus. $1.1150 (S1) is the first swing low following a downward breakout, whereas an attempt upward must see the $1.16 (R1) breach as a first milestone.

Externally to the short-term levels, $1.1060 (S2) and $1.1650 (R2) could open the door to $1.0920 (S3) and $1.1740 (R3). In the interim, $1.15 is a near-term ceiling bulls must recapture.

Key takeaways

Based on data that will be released tomorrow, the UK might be headed for a recession. The event is likely priced into the market, which means better-than-expected data could be bad news for stocks since it would mean more interest rate hikes from the BOE, and good for the British pound.