Pound Sterling Live: GDP Numbers Aid Shallow Recovery

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- Snapshot: GBP/EUR @ 1.1116 -0.01% | GBP/USD @ 1.2472 +0.15%

- Sterling near two-year lows vs. Dollar

- December low vs. Euro in view

- But sentiment towards Sterling could be too negative

- GDP data release offers unexpected surprise

The UK economy grew 0.2% in the three months to May reports the ONS, beating market expectations for a reading of 0.1% growth.

The economy meanwhile grew 0.3% in the month of May, beating analyst expectations for growth of 0.1% to be recorded and easily overturning the -0.4% reading that was recorded in April.

The data is, on balance, positive from a currency market perspective and we have seen some support being registered in various Sterling exchange rates.

The positive GDP numbers were perhaps dampened by the Manufacturing Production numbers out at the same time: a month-on-month reading of 1.4% for May did disappoint against expectations for a reading of 2.2%.

While this figure does come in below analyst expectations, it does represent a solid bounce-back for UK manufacturers considering April saw a -4.2% decline.

Elsewhere, the Index of Services grew 0.3% ahead of expectations for a reading of 0.1%, suggesting the UK's largest economic sector continues to churn out growth and underpin economic activity.

The rebound in GDP appears to be largely driven by a return to growth in vehicle manufacturing. The April declines in activity were largely as a result of car manufacturers bringing forward their summer shutdowns to coincide with the original Brexit date. A return to production in May understandably saw economic growth levels return to near-trend levels.

"Making sense of the UK growth data is not straightforward at the moment. The economy rebounded by 0.3% during May, albeit this was predominantly driven by production," says James Smith, Developed Markets Economist with ING Bank. "Overall second quarter growth will come in flat, or possibly slightly negative. With the growth story unlikely to improve dramatically in the third quarter, we think the Bank of England is likely to keep policy on hold this year."

The data nevertheless coincides with a firming of the Pound which has been under notable pressure lately: The Pound-to-euro exchange rate is quoted at 1.1119, having been as low as 1.1098 in the past 24 hours. 

Meanwhile the Pound-to-Dollar exchange rate is quoted at 1.2480 having been as low as 1.2440 over the course of the past 24 hours.

"The UK's economic growth is indeed surprising, especially against the background of relatively subdued macroeconomic data in the recent past. Given the political ups and downs, however, the British pound is unlikely to appreciate significantly," says Marc-André Fongern, Head of Research at MAF Global Forex.

Those looking for a stronger Pound were hoping today's data offered some near-term respite to potentially exchange out of Sterling. "We think the bearishness toward GBP looks a little overstretched," says Ned Rumpeltin, a foreign exchange strategist with TD Securities in London. "The GBP has come under notable pressure... with concerns over the UK's growth prospects rising, we are actually looking for notable upside to the UK's May monthly GDP report."

"It does appear that Sterling has a lot of bad news in its price. The question, however, is what could provide a catalyst for a potential reversal? This puts Wednesday's monthly UK data dump into view," says Rumpeltin. "If an upward surprise on the data is realised, it "could be the catalyst for some short covering."

'Short covering' is the process where a market that is overwhelmingly engaged in a one-way trade reverses sharply on fresh news that prompts traders to book profit.

Rumpletin does caution however that any recovery in Sterling would last only "over a (very) short-term horizon."

Others however suggest that any trigger to a meaningful recovery would almost certainly be political in nature, given Sterling's ongoing obsession with Brexit outcomes.

"There isn't much love for the Pound right now as UK political risks look set to keep a lid on the currency's upside potential in 2H19. But with a large degree of bad news already priced in (positioning) - and markets in our view overestimating the odds of a no-deal Brexit and potential 2019 BoE rate cut - we think the near-term balance of risks to GBP lie to the upside," says Viraj Patel, a foreign exchange analyst with Arkera.

Patel says Sterling is already pricing in a pretty bleak outlook for UK politics and the political landscape after 24 July will be interesting.

July 24 is when the new Prime Minister is set to take office, and we get a clearer sense of the direction of travel.

"The balance of risks favour a short-term GBP correction higher after the Tory PM vote - with 2 potential catalysts: 1) A surprise Hunt victory (worth a 1.5%-2.0% rally in GBP) or 2) a more diplomatic PM Johnson than what markets currently anticipate," says Patel.

The selling pressure suffered by the Pound so far this week is a mere extension of the broader sell-off seen in the currency since early-May, confirming market sentiment remains overwhelmingly bearish with politics remain the central concern for market participants.

"Sterling continued fighting an uphill battle as persistent political uncertainty, signs of a sharp cooling of the UK economy and technical factors all conspired against the UK currency," says Mathias Van der Jeugt, an analyst with KBC Markets in Brussels.

"Sterling made tentative gains after data showed the UK economy proved more resilient than expected in May, following the sharp contraction in GDP in April," says Andy Scott, Associate Director at JCRA, a financial risk advisor. "Though Sterling strengthened after the GDP news, it is still trading close to its lowest levels of the year against the Dollar and the Euro due to fears that Boris Johnson will become PM and pursue a hard Brexit."

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