UK GDP (QoQ) (2Q A) (08:30 GMT; 04:30 ET)
Expected: 0.7%
Previous: 0.7%

UK GDP (YoY) (2Q A) (08:30 GMT; 04:30 ET)
Expected: 2.9%
Previous: 3.0%

How Will The Markets React?

Economic expansion in the UK during the second quarter is anticipated to maintain its robust pace of 0.7 percent from the quarter prior and 2.9 percent from the previous year. Similar factors should continue to fuel growth, as rising house prices should help resilient consumption to drive the services sector. Meanwhile, government spending is likely to remain supportive of GDP, as June is one of the two main months of the year for interest payments on government debt. Looking towards the third and fourth quarters, expansion could see a more marked slowdown, as the Bank of England’s three rate hikes since the beginning of the year will start to take their toll. In fact, Bank of England Deputy Governor Sir John Gieve said on July 10th, “The issue for me is have we done enough to bring inflation back on a sustained level of two percent in the long term…There are some signs that the past interest rates may be coming through in consumption and housing, but it is not clear cut yet…If we saw a bit of a switch into stronger investment and exports and slightly weaker consumption, that would be no bad thing.” Clearly, the Bank of England is willing to take the risk of slower growth in order to keep inflation in check, which tilts the policy bias towards further tightening regardless of whether GDP improves or dissipates. Nevertheless, UK asset classes will pay heed to Friday’s GDP report, as surprises to either the upside or downside will prove to be the most market-moving, while figures in line with expectations are not likely to rock the boat.

Bonds – 10-Year Long Gilt Futures

Gilts have remained fairly well contained within the recent range, with price holding up above a short-term ascending trendline near 103.95. Recent highs and a descending trendline come into play at 104.18/20 with more substantial resistance at 104.38. Some slightly dovish comments from BOE Governor Mervyn King and softer retail sales put some fire under Gilts, and looking ahead to Friday, a surprising Q2 GDP report could send contracts reeling. An unexpected acceleration in UK economic expansion could send Gilts plunging lower as already-tight capacity constraints may only become more limited and up the ante for a BOE hike in the near term. On the other hand, a sharp slowdown may be enough to send price shooting up to the 104.38 level.

FX – GBP/USD

GBP/USD has fallen back from its recent 26-year highs of 2.0548 amidst slightly dovish commentary from Bank of England Governor Mervyn King and softer-than-expected retail sales for the month of June. Governor King focused on an expected easing in inflation pressures when he said, “We have to look through the short-term volatility caused by gas and electricity prices. In our view, inflation will come down during the rest of the year. It is likely to drop further but we will have to wait and see.” Nevertheless, GBP/USD remains elevated as dollar bulls have yet to take a firm hold on the forex markets. Looking ahead, the pair will run into some event risk with the release of Q2 GDP. An unexpected acceleration – simply a stronger-than-estimated figure – in UK economic expansion could send Cable up to retest the highs near 2.0550, as already-tight capacity constraints may only become more limited and up the ante for a BOE hike in the near term. On the other hand, a sharp slowdown in GDP may be enough to send the pair plummeting through support at 2.0450/75 towards 2.0400.

Equities – FTSE 100 Index

UK blue chips rebounded on Thursday as FTSE heavyweight Vodafone Group reported upbeat guidance. The benchmark index closed 1.1 percent higher at 6,640.20, bouncing from trendline support, after Vodafone announced that their subscriber growth had swelled 4.1 percent in the first quarter, adding 9.1 million subscribers in the three months through June. The news sent shares of the world’s largest mobile-phone company up 2.3 percent to 161.4 pence. Meanwhile, rising Shanghai copper prices and supply concerns bolstered mining sector stocks adding 2.4 percent to BHP Billiton and 2.5 percent to Rio Tinto, closing at 1,479 and 3,764 pence, respectively.

The FTSE 100’s uptrend could be in danger of crumbling on Friday as Q2 GDP figures are scheduled to be released. While actual results in line with estimates aren’t likely to be very market moving, a surprise to the upside or downside could yield mixed results. Though signs of weaker expansion could be construed as being bearish for the FTSE 100, as consumer-oriented shares would suffer, financial shares would likely see gains as a sharp economic slowdown could help curtail some of the BOE’s hawkish sentiment. Nevertheless, inflation data will certainly play a greater role in BOE policy, so any price action based on the GDP report may only be temporary.

Terri Belkas is a Currency Strategist at FXCM.