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UK Q1 GDP leap may mask Iran war slowdown risk for sterling
Britain's Q1 growth leap backed sterling initially. Iran war risk threatens to unwind that momentum, cap BoE rate hikes, making April inflation the test.
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Britain's first-quarter GDP growth accelerated sharply, a print that initially validated the hawkish path from the Bank of England. Sterling ticked higher against the dollar, and short-sterling futures repriced to reflect a higher terminal rate. The glow from the data cooled quickly. Traders began to price in the demand destruction an escalating Iran war could inflict on a trade-exposed UK economy.
GDP Upside and Rate Path Repricing
The strong Q1 number would normally lock in at least one more rate hike from the Monetary Policy Committee. The repricing, however, ran into the existing headwind of gilt market fragility. BoE hawk Catherine Mann had recently warned that a disorderly repricing in gilts could force the Bank to hike by more than otherwise needed, a scenario that would ultimately choke off consumer activity faster. In the immediate aftermath, money markets lifted the implied peak for Bank Rate, and the pound firmed. The move was short-lived. The GDP release likely captures a moment before the Iran crisis escalated, meaning its signal is already stale.