Goldman Sachs' nowcasting model sees another quarter of modest UK growth. The GDP print will test the BOE's rate path and the pound's yield advantage. Here's what to watch.
Alpha Score of 45 reflects weak overall profile with strong momentum, poor value, poor quality, weak sentiment.
The UK economy is expected to keep expanding in the second quarter, according to Goldman Sachs' latest nowcasting model. The bank's economists see another period of modest growth, even as business surveys have softened. The official GDP print, due in the coming weeks, will either confirm or upend that view.
A number that misses the model's estimate would reinforce the slowdown narrative. The Bank of England would face pressure to cut rates sooner, narrowing the pound's yield advantage over the euro and the dollar. Sterling has already given back some of its 2024 gains against the dollar, slipping from the 1.35 handle to the 1.3420 area. The GBP/USD pair now sits near the middle of its recent range, with options markets pricing in elevated volatility around the release.
A GDP beat, by contrast, would keep the BOE on hold. The market has priced in roughly 50 basis points of cuts through year-end, according to overnight index swaps. A strong print would push those expectations lower, lifting gilt yields and widening the spread over bunds and Treasuries. That would give the pound a tailwind against both the euro and the dollar. The EUR/USD pair, already under pressure from the European Central Bank's own rate outlook, could slip further if the pound strengthens.
Goldman Sachs' model has a solid track record in recent quarters. It correctly called the first-quarter expansion when many surveys pointed to a contraction. The second-quarter reading is critical for the ruling Labour Party's narrative of economic recovery. A miss would add political risk, while a beat would buy the government time.
Traders will also watch the components. Services output, the dominant sector, has held up better than manufacturing. A services-led expansion would be less alarming than a broad-based decline. The construction and industrial production numbers will also factor into the headline.
The GDP release is the next major catalyst for sterling. Until then, the pound will likely trade within the 1.34-1.35 band against the dollar and the 1.17-1.18 range against the euro. A break on either side will depend on the print.
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