The UK Q1 final GDP data shows a quarter-on-quarter growth of 0.7%, consistent with the preliminary estimate. This represents a rise from the previous figure of 0.1%.

Year-on-year, the GDP increased by 1.3%, aligning with the preliminary figures, although it is a decrease from the prior year’s 1.5%. The growth is primarily driven by the expansion in the services sector.

First Quarter Growth Analysis

With the confirmation of first-quarter GDP growth at 0.7%, consistent with earlier estimates, we observe a notably firmer recovery in output compared to the subdued figure at the end of last year. Although annual growth has eased slightly to 1.3%, aligning with flash readings and trailing the previous year’s 1.5%, the underlying momentum appears fairly stable. The expansion has been supported largely by services, where professional, scientific, and administrative activities saw measurable gains, often linked to improving demand conditions and a modest uptick in business investment.

Hughes, looking beyond the headline reading, noted that household spending edged up, a signal that real wage growth and easing inflationary pressures may now be feeding through consumption more steadily. This aligns with recent data from the labour market, showing slightly better employment levels and moderate wage rises, though nothing particularly overheating.

Carter pointed to some resilience across private sector output, with business confidence recovering from February lows. Manufacturing, while not leading growth, avoided contraction, contributing positively to the quarter’s aggregate picture. There’s little evidence, however, of any overexuberance. Construction volumes were flat, and public sector output remained broadly neutral—consistent with controlled fiscal expenditure.

We see short-term interest rate expectations beginning to stabilise, largely in response to both robust quarterly data and less volatile inflation figures. Markets have dialled back speculation of deeper rate cuts in the second half, and yield curves have flattened at the front end. This has affected positioning, particularly in short-sterling contracts and SONIA-linked instruments, where open interest has adjusted in recent sessions.

Market Sentiment and Expectations

Beyond the GDP headline, a key takeaway is that volatility has been relatively well-contained over the past week, but that can shift quickly as we move closer to key policy updates from the central bank. While the immediate reaction to the GDP release was muted, pricing in more settled growth has supported modest steepening in longer maturities. That suggests investors are starting to accept a firmer floor for economic momentum in the near term.

Owens has suggested that terminal rate expectations have firmed slightly. This seems justified given upside surprises in both wage growth figures and select producer price metrics. Such conditions call for tighter scrutiny of forward contracts, particularly for early-autumn expiries. The asymmetry in potential rate guidance, no longer aggressively dovish, makes overextended short positions vulnerable to sharp reversals.

We are now weighing real output trends against inflation data that continues to moderate, but not at a pace likely to trigger immediate accommodation. Pricing pressures have decelerated in goods but remained persistent in services—especially in housing-linked components—delaying the broader disinflation process.

In terms of strategy, directionality tied to rates policy remains sensitive to even shallow revisions to growth. Options volumes have held steady, but skew has rotated mildly towards calls on short-end futures, suggesting that larger players envision limited downside in the short term. For those watching risk reversals and implied volatility pockets, early July may provide clearer opportunity once further inflation prints are released.

Until then, curve-based trades and relative value setups based on services resilience—as well as the cooling in construction and trade volumes—require close monitoring. Timing entries around these releases, rather than forecasting directional risk over multiple sessions, seems the more reliable driver of returns for now.

We anticipate that positioning will continue adjusting incrementally over the next fortnight, particularly as volume returns following the summer lull.

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