• Monthly GDP and production figures for June on tap

• Strong data might hurt August rate cut expectations

• Pound flirts with $1.28 ahead of Thursday’s release (06:00 GMT)

Uptick in GDP expected

The UK economy got off to a solid start this year, emerging strongly from a technical recession in the second half of 2023. GDP grew by an impressive 0.7% quarter-on-quarter in the January-March period. But growth came to a halt in April and investors will be watching the May data to see whether that was a blip or if the economy hit another soft patch in the second quarter.

Analysts are forecasting GDP to have risen by 0.2% month-on-month in May, pushing the annual rate up to 1.2%. The services sector and industrial production are also expected to have expanded by 0.2% m/m.

UK still a G7 laggard

Despite the turnaround, however, GDP growth has yet to return to its pre-Covid trend and Britain fares only better than Germany among the big, advanced economies when it comes to the post-pandemic recovery.

Hence, the UK economy is far from being in danger of overheating and unless there’s a notable upside surprise, the May figures are unlikely to pose a significant obstacle to the Bank of England starting its easing cycle soon. Investors have priced in around a 60% probability of a 25-basis-point rate cut at the August 1 meeting, with one additional cut expected before the year-end.

A brighter outlook?

The likelihood of the BoE cutting rates before the Fed hasn’t been too damaging to the pound. The British currency is the second-best performer of 2024 so far, behind only the US dollar. This is partly attributed to the brightening economic outlook, which may improve further now that the UK has a new government.

Prime Minister Keir Starmer and his Labour government have set boosting economic growth as one of their top priorities, while the political stability that their large parliamentary majority is expected to provide is also positive for sterling.

The pound is currently attempting to secure a foothold above the $1.2800 level after several sessions of testing the level. An upbeat set of data on Thursday could help its cause, bringing the March peak of $1.2893 back into scope.

However, if the growth numbers disappoint, bolstering expectations of an August rate cut, the pound could dip all the way towards its 50-day moving average, currently at $1.2689.

On the whole, the GDP readings are not anticipated to be hugely consequential for BoE rate cut bets, especially as the CPI numbers for June are due a week later on July 17. If the CPI report shows headline inflation remaining close to 2.0% and the core rate declining further, that could seal the deal for an August move by the Bank of England.