UK GDP Preview: GBP/USD buy opportunity? Low expectations for December open door to upside surprise

Dreadful December is the conclusion from an examination of the economy's performance in October and November, and where the consensus is about its woes in the last month of 2021. Low expectations open the door for an upside surprise, and sterling is set to benefit. 

On Friday Britain releases monthly and quarterly GDP reports, helping FX traders tune their expectations and their position sizes. The UK economy grew by 0.2% in October and 0.9% in November, accumulating to roughly 1.1% in compound growth. However, the estimates for the entire fourth quarter are exactly 1.1% – a freeze in new activity just as winter officially began.

GDP growth has yet to stabilize in the post-pandemic era:

Source: FXStreet

The main reason for downgrading projections stems from the Omicron COVID-19 variant. This highly contagious strain caught the world's attention in late November and fully hit Britain's shores in December. Prime Minister Boris Johnson's government announced the enaction of Plan B – a set of restrictions meant to stem the spread.

These new limits came from a scandal-ridden PM, however, and met an exhausted public. Moreover, Omicron seemed less lethal from the outset, prompting Brits to fewer limits than in previous waves. Since most adults were fully vaccinated they went about with less fear. 

Another reason to expect a diminished economic impact is the fact that developed economies have learned to live with the virus – at least economically. US Federal Reserve Chair Jerome Powell stresses this point, which is relevant also to Britain. 

The last factor to consider is rapid growth in the US – 6.9% annualized in the last quarter of 2021 – which implies Britain's economy didn’t suffer that much either. Nor did the sharp drop in US retail sales in December dent overall growth. 
 

GBP/USD potential reactions

A quarterly increase of 1.5% or higher would boost GBP/USD, showing that the economy is still expanding quickly and implying a quicker pace of rate hikes from the Bank of England. Such a scenario seems likely given the overly downbeat forecasts. 

Conversely, coming out at 1% but below 1.4% would be considered within estimates and would likely cause only limited price action in GBP/USD. 

It would take a quarterly increase of 0.9% – basically reflecting only one month of growth, in November – to push sterling down. 

Final thoughts

Quarterly GDP releases tend to have more impact than monthly ones, and uncertainty about the BOE's next policy moves adds to potential volatility. In conclusion, there is more room for an upside surprise than a downside one.