The first reading of UK Q2 growth due this week is seen as the main release driving the markets. Expectations point to a continuation of strong output although downside risk looms.
The more the first estimate of second-quarter growth surprises on the upside the bigger the chance central bank kicks off the first round of monetary tightening this year. If this is the case, sterling should again enjoy a significant boost this week.
First, the Bank of England (BoE) publishes minutes from its Monetary Policy Committee (MPC) July meeting on Wednesday. Even though the logs should confirm a unanimous vote on both the base rate and quantitative easing, economists expect the first signs of a rift emerging among the nine-member rate-setting committee.
A more-balanced argument on monetary policy decision among some MPC members could be reinforced by a further strengthening of the UK labor market and signs of growth keeping its momentum in the second quarter.
The only offsetting factors to an earlier tightening of policy is persistently weak wage growth and subdued consumer price inflation with the former, however, being at odds with other commercial data suggesting sharp rises in salaries.
A more hawkish tone of the MPC minutes should boost sterling the same way it did during BoE Governor Mark Carney's famous 'U-turn speech' at Mansion House in June when he for the first time explicitly and publicly hinted that the first interest rate hike may come sooner than markets had expected. "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect," Carney said.
Second, the first estimate of second-quarter GDP due on Friday should show growth kept its momentum by growing 0.8%.
The first unofficial estimate was published earlier in July by NIESR, which suggested the economy had grown at even a faster pace of 0.9% in the second quarter while output was seen 3.2% above where it was during the same period a year ago.
The NIESR economists also said the month-on-month blip in the latest industrial production figure, which accounts for some 15% of the total GDP, was expected "to weigh only marginally on the economy’s overall robust performance in the second quarter."
"The surprise drop in UK manufacturing output in May was unlikely to be a true reflection of what was happening in the sector," Robert Wood of Berenberg Bank wrote in a note after the data were made public earlier July, adding that "it is utterly at odds with strong survey readings and the 1.8% rise in manufacturing employment over the past year."
According to Markit, manufacturing kept its steady pace in the second quarter and posted its second highest PMI reading in forty months in June. Also, the composite PMI for the whole of the second quarter suggested the economy grew at a pace of 0.8%, which would be unchanged from a rise in the first quarter.
Another sudden plunge in data occurred in construction sector, where output dropped unexpectedly by 1.1% in May. ONS analysts said the output should grow around 2.5% in June in order to post at least a flat growth overall in the second quarter, which would compare with an upwardly revised output of 1.5% in the first quarter.
Again, the official data runs contrary to commercial indicators published by Markit, suggesting construction output rebounded towards the end of the second quarter driven by faster expansions of housing and commercial building activity.
The only sector to save the first estimate from disappointment should be the robust services sector, accounting for around 78% of the total GDP output. The above-mentioned seasonal blips in construction and manufacturing could be easily offset by the omnipotent services, given the output there keeps its strong output figures in the second quarter too.