The British economy is working under a microscope. Yet it is reeling from a perfect storm of crises that have raised alarm bells over the industry’s longterm viability. Economists and analysts are particularly focused on the anticipated release of the Gross Domestic Product (GDP) data for July, scheduled for Friday at 06:00 GMT. As we reported last week, that represents a paltry growth rate of 0.3% in the second quarter. This is a significant drop from the 0.7% growth registered in Q1.
James Smith, an economist at ING, highlighted that the second-quarter growth was largely driven by expectations surrounding US tariffs and tax changes. But he warned that these factors would make no permanent difference to the economy. British Chambers of Commerce (BCC) has noted that the UK is caught in a “low-growth trap.” They warn that deeper structural problems might hold back a more dynamic upturn.
Even with these challenges, the British Pound (GBP) put on a brave face against its US Dollar counterpart on Thursday. The GBP/USD pair enjoyed a powerful comeback. This increase was most notably headed by a softening US Dollar following the publication of the most recent inflation figures. FX traders are understandably focused on how the changing landscape with imminent GDP figures could move currencies.
Challenges Facing Economic Growth
The UK’s economic landscape has been one of stagnant growth over many quarters, leading forecasters to downgrade predictions.
Consumer Price Index
The BCC continues to forecast the Consumer Price Index (CPI) to peak at 3.7% this year. This increase would make the economic recovery that much more difficult to achieve.
Additionally, business investment is now projected to grow less, by nearly 3 percentage points. Instead of 4.8% growth in 2025, we’re only expected to see 1.6%. This steep downward revision is indicative of the overall picture that businesses continue to exhibit extreme caution amid deep ongoing uncertainty. Stubborn trade friction is further damaging our export outlook. To undermine this is very dangerous in particular for key partners such as the United States and the EU.
And according to recent Purchasing Managers Index (PMI) releases, growth is booming—the strongest level in a year. Underneath the surface, signs of stagnation are beginning to show. Chris Williamson, Chief Economist at S&P Global, expressed concerns regarding future growth, stating, “It would be optimistic to expect a further monthly jump in GDP after the June surprise.”
Market Reactions and Currency Movements
As wait begins for the next GDP report, the market has largely adjusted to some mixed economic news. On Thursday, the GBP appreciated to be the strongest G10 currency against the USD. This trend is the first sign of a broader shift in investor sentiment. The GBP/USD currency pair bounced back in favor of the US Dollar’s broader weakness. This generated some thrilling opportunities for traders.
Following last week’s volatility, analysts are looking toward pivotal technical levels to drive currency’s next moves. In the short term, if the price breaks below 1.3540 we can expect a deeper pullback. This might bring it lower to the flag’s bottom edge at 1.3500 and the 100 Simple Moving Average (SMA) on the 4-hour chart, presently at 1.3484. These will be the most important technical indicators that traders will be keeping their eye on during this period of economic uncertainty.
Looking Ahead
The upcoming GDP data is expected to be pivotal in determining the direction of the British economy in the short term. The analyst consensus indicates that monthly growth could grind to a halt after the surprising return to growth of 0.4% in June. This stagnation may be indicative of this larger current of economic uncertainty that has affected the UK.
Looking ahead to 2025, the long term prospects have been increased to 1.3%, from 1.1% previously. We now have this policy change, which offers a new glimmer of hope that things could get better. Many remain cautious about the sustainability of this growth amid ongoing external pressures and internal challenges.