FX.co ★ GBP/USD: UK Economic Growth Report

Today, the GBP/USD pair is attempting to develop a corrective rise, reacting to the release of the UK GDP growth data. All components of the report came out in the green zone, indicating that the country's economy avoided stagnation in the second quarter. This fact is significant in itself, and given recent events, today's release becomes especially crucial. After all, at stake is the fate of the interest rate in the context of the current monetary policy tightening cycle. And if the first quarter results constrained the Bank of England's flexibility, the second quarter results, on the other hand, allow the English regulator to consider raising the rate if necessary.

Recall that following the August meeting, Bank of England Governor Andrew Bailey focused on the side effects of aggressive policy. He stated that the central bank encountered "unpleasant surprises" in the previous reporting period. Therefore, in making interest rate decisions, the members of the regulator "took into account all existing risks." The pound reacted negatively to this rhetoric, as it had a "conclusive" undertone. Bailey implied that if the main macroeconomic indicators continue to show a downward trend, the likelihood of further monetary policy tightening would approach zero. That's why today's report is so important for the British currency. After all, the published figures allow the regulator not to rule out the possibility of a rate hike.

Namely, the UK's GDP volume in the second quarter increased by 0.2% year-on-year, with a zero growth forecast. For comparison, the first quarter recorded a growth of 0.1%. In quarterly terms, the figure rose by 0.4%, with a growth forecast of 0.2% (the previous quarter also recorded a growth of 0.2% YoY). Speaking of monthly growth, a decent picture also "emerged": in June, the British economy grew by 0.5% on a monthly basis (the fastest pace since October 2022) and by 0.2% quarterly. This component similarly ended up in the green zone, as experts expected more modest growth (0.2% MoM and 0.0% QoQ).

The industrial production growth indicator showed a relatively strong result: in June, it increased by 1.8% (MoM) after a 0.2% rise in May. This is the strongest pace since April 2021. Year-on-year, industrial production volume increased by 0.7%. Notably, this report component entered positive territory for the first time since June 2022. Positive dynamics were also recorded in the manufacturing sector: year-on-year, production volume increased by 3.1%—the highest figure since April 2021. Similarly, both the service sector indicators and the construction sector indicators were in the black.

Overall, the published figures indicate that the UK economy avoided stagnation in the second quarter.

Responding to this release, the GBP/USD pair tested the resistance level of 1.2720—the Tenkan-sen line on the daily chart. However, buyers couldn't overcome this target, even in the face of the overall weakening of the greenback.

It's worth noting that recently, the pound has been sagging across the market amid strengthening arguments for a pause in the Bank of England's tightening policy. Inflation figures for June were in the red, and the labor market disappointed with increasing unemployment and a rise in jobless claims. The PMI indices were also disappointing. Following this, there was heightened speculation among experts that the English regulator would adopt a wait-and-see stance in September.

Today's report didn't turn the story around. The negative background continues to put pressure on GBP/USD, so the pair's bullish momentum almost immediately faded as soon as it began. The second quarter economic growth report must be viewed in conjunction with inflation reports, which will be published in the UK later in August. If inflation continues to decrease at active rates, the likelihood of maintaining the status quo at the September meeting will still be high. Only a rapid acceleration of inflation indicators will change the situation significantly. In other words, everything now hinges on inflation: if the indicators are in the green zone, hawkish expectations regarding the Bank of England's further actions will grow. Otherwise, the pound will be under consistent pressure. In this context, today's release can be described as a "delayed-action release."

Considering this disposition, it's advisable to look at long positions in the pair only after buyers have consolidated above the 1.2720 target (Tenkan-sen line on the D1 timeframe). In such a case, the next target of the bullish movement will be 1.2820—the middle line of the Bollinger Bands indicator on the same timeframe.