Economic expansion in the UK during Q1 is expected to slow to the weakest pace in three years, as a faltering housing sector weighs on growth. The UK’s Gross Domestic Product index is forecasted to rise only 0.4 percent from Q4, while the annualized pace is anticipated to slow to 2.6 percent from 2.8 percent.

APR 25 UK GDP (QoQ) (1Q A) (08:30 GMT; 04:30 EST) UK GDP (YoY) (1Q A) (08:30 GMT; 04:30 EST)
Expected: 0.4% Expected: 2.6%
Previous: 0.6% Previous: 2.8%

What Are the Markets Facing?

Economic expansion in the UK during Q1 is expected to slow to the weakest pace in three years, as a faltering housing sector weighs on growth. The UK’s Gross Domestic Product index is forecasted to rise only 0.4 percent from Q4, while the annualized pace is anticipated to slow to 2.6 percent from 2.8 percent. Indeed, the minutes of the Bank of England’s April meeting showed that the Monetary Policy Committee noted that the “housing market was weakening, with prices falling, so there was an increased downside risk to residential investment and to consumption. But mortgage arrears and possessions still remained low, and employment had been rising…But it was still unclear how far these housing market developments would amplify the expected slowdown in consumption growth.” Nevertheless, as the MPC said, consumption and output has slowed, “but not yet by as much as expected at the time of the February Inflation Report.” Specifically, PMI reports for the first three months of the year have showed that conditions in the manufacturing sector have deteriorated, but output is still growing, albeit at a softer pace. The services sector, on the other hand, remains robust. However, given the sharper than expected drop in retail sales during the month of March, it appears that consumption may have started to ease significantly going into Q2. Overall, the risks for this GDP report are to the downside, as tighter credit conditions and a marked weakening in the housing sector likely took a toll on domestic demand, so traders should watch for a disappointing figure that could shake up the markets.

Bonds – Long Gilt Futures

Gilts have fallen significantly over the past week following the BBA’s announcement that a review of the system that sets Libor rates that was initially planned for June is now “currently under way” amidst increasing questions about its reliability and speculation that banks were underreporting the rates they pay to borrow. Indeed, a day after the announcement, Libor rates jumped to the highest levels since March 13 and weighed on Gilts, indicating that banks were rushing to report their borrowing costs more accurately. Fibonacci support has thus far provided support, but Gilts have had trouble pushing above the 200 SMA at 108.59. Friday’s release of Q1 GDP could lead the contract to bounce toward 108, but if the data is better than expected, Gilts could continue falling toward 106.60.

FX – GBP/USD

The GBP/USD pair continues to consolidate within a wide range, but with recent COT data showing the British pound at bearish extremes, the pair may be forming a short-term bottom and could ultimately push above the 2.00 level. However, if the release of Q1 GDP proves to be disappointing, GBP/USD could break below near-term support to target 1.9600. Indeed, expansion is expected to have slowed, but given the more restrictive credit conditions and deterioration of the UK housing sector, there is some potential that GDP will be much weaker than forecasts. On the other hand, if the data is surprisingly strong, traders will start to bet that the Bank of England will not cut rates again next month, which could lead GBP/USD to jump toward 1.9800.

Equities – FTSE 100 Index

While the FTSE 100’s break above the psychologically important 6,000 level and the 100 SMA at 6,013 looks bullish, the index has had difficulty breaking above the late February highs near 6,100. On Friday, Q1 UK GDP figures will be released, and if the data is disappointing, the index could fall lower for another test of 6,000. On the other hand, if the data is surprisingly strong, the FTSE 100 could jump above near-term resistance to target the 200 SMA at 6,196.

Terri Belkas is a Currency Strategist at FXCM.