How to trade FTSE 250 and EURGBP ahead of the UK GDP data

UK growth outlook makes grim reading

The UK growth path has come under intense scrutiny over the course of the past week, with the IMF forecasting that 2023 will see the country fare the worst of all the developed and emerging economies they cover. Speculation of a lost year brings concerns for investors, with a cost-of-living crisis coming as Brexit impacts overall economic activity. The Bank of England are hardly less gloomy than their IMF counterparts, with last week seeing them forecast a 2023 growth rate of 0.5% (vs 0.6% from the IMF). Notably, the BoE sees no return to pre-Covid levels until 2026 at the earliest. With the ONS set to release the December and Q4 UK GDP figures tomorrow, will this mark the beginning of a contraction phase for UK economic activity? Forecasts point towards the year-on-year Q4 figure dropping from 1.9% to 0.3%. Meanwhile, the December figure drops back into contraction territory (estimates between -0.1% and -0.3%) after a November figure of 0.1%.

The rate outlook remains cloudy for the UK, with the relatively elevated inflation rate quelling calls for a swift reversal in rates to counteract economic weakness. However, recent commentary from the Bank of England does highlight a relatively dovish stance compared with their ECB and Federal Reserve counterparts. BoE Firstly, BoE Governor Bailey has stated that he expects inflation come down sharply, while MPC member Tenreyro has stated that he sees interest rates as already being too high. However, it is important to note that while the economic struggles could put pressure on the BoE to ease as quickly as possible, that will only be an option once inflation comes back to a palatable level. Otherwise, the MPC could be responsible for a hugely damaging inflationary spiral.

FTSE 250 continues to push higher despite economic clouds

While we are seeing widespread forecasts of economic strife in the UK, equities continue to make up lost ground as they build on the rebound seen throughout stock markets over the past four-months. The trend always remains your friend despite skepticism over whether it is warranted, with calls for a market reversal falling on deaf ears for now. However, while much of the upside seen for equity markets comes from the US in the face of a soft landing and significant disinflation, the UK appears to have neither of those factors as it stands. With that in mind, a reversal for equity markets in the absence of a major decline in UK inflation could hit the domestically focused FTSE 250 index particularly hard. However, until we see a break below the 19579 swing-low, the uptrend does remain in play.

EURGBP Technical analysis

The pound also looks to be at risk, with the relative economic underperformance and BoE desire to ease policy as soon as possible bringing the potential for further weakness. The question for some is what happens if UK inflation remains elevated as eurozone prices fall back. That could bring potential weakness for the pair, although the recent data out of Germany and France signal a potential impending slowdown for eurozone CPI. EURGBP has been weakening over much of the past week, bringing price into the 61.8% Fibonacci support level. A break back below the likes of 0.8722 and 0.8762 would signal a potential bearish reversal for the pair. Until then, there is a good chance we see the pair turn higher once again following this deep retracement. All eyes turn to the UK GDP data to signal whether we have indeed seen the UK contract in the fourth quarter.