Markets have another busy day ahead in terms of earnings and data. The US Q1 GDP print is expected to show growth of 1.0%, down from 6.9% in Q4. That likely overstates the real situation in the economy, with weaker trade data and slower inventory growth depressing GDP (note there are a number of sub-1% forecasts in the Bloomberg survey and some economists are looking for negative growth). Details should be positive on the demand side, however, and PCE data will reflect elevated price pressures, which will keep the Fed on track for tighter policy. Still, there may be some “sticker shock” for the USD on a weak headline GDP print but minor dips are liable to represent a buying opportunity.
The GBP fell under 1.25 overnight to then recover but then fall deeply under the figure as it remains under pressure on the day with a 0.5% decline that follows the broad dollar-positive tone. Domestic price catalysts are limited with no key data or events on the calendar until next week’s BoE policy decision. Sterling one-week risk reversals show the largest downside risk for the GBP over the following week since the initial days of the Russian invasion of Ukraine. Though part of this follows from the risk-off mood in markets and the steep losses in the GBP, a BoE rate hold cannot be ruled out—though it is far from being our base case. The BoE will likely signal a much narrower path for hikes than markets are anticipating, which presents the main GBP downside risk in our opinion. The pound may still hold around 1.25 over the coming days, but a dovish BoE and weak macro figures over the coming weeks could see the GBP fall another two or three cents; with the broad dollar tone an important unknown.
