The UK economy has shown signs of improvement, with GDP growing by 0.7% in the first quarter of the year. Analysts are now expecting a 0.2% increase in GDP for the month of May, which would push the annual rate up to 1.2%. The services sector and industrial production are also forecasted to have expanded by 0.2% month-on-month.
Despite this positive trend, the UK still lags behind other G7 countries in terms of post-pandemic recovery. The economy has not yet returned to its pre-Covid levels, and there is still room for improvement. Investors are currently pricing in a 60% probability of a 25-basis-point rate cut by the Bank of England in August, with another cut expected before the end of the year.
The British pound has been performing well in 2024, partly due to the optimistic economic outlook. The new Labour government, led by Prime Minister Keir Starmer, has made economic growth a top priority. The political stability provided by their large parliamentary majority is also seen as positive for the sterling.
Currently, the pound is hovering around the $1.28 level and is looking to break above it. A strong set of data released on Thursday could help the pound further, potentially pushing it towards its March peak of $1.2893. However, if the growth numbers disappoint and raise expectations of an August rate cut, the pound could drop towards its 50-day moving average of $1.2689.
Overall, the GDP figures expected to be released are not likely to significantly impact the bets on a rate cut by the Bank of England. Investors are also keeping an eye on the CPI numbers for June, which are due a week later. If the CPI report shows inflation remaining close to 2.0% and the core rate declining, it could solidify expectations of an August rate cut by the central bank.
