Pound Sterling Buoyant After Data Tells of Resilient UK Economy

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Pound Sterling climbed against all major currencies except an outperforming Australian Dollar on Thursday after official data cast the UK economy in a resilient light for the second quarter.

Sterling rose broadly in early trade with its largest gains seen in relation to the US Dollar, Euro and South African Rand after the Office for National Statistics said GDP rose 0.6% over the second quarter.

That was down a touch from 0.7% in the prior quarter but in line with expectations and still at the higher end of the range of typical outcomes from the pre and post-pandemic periods.

However, the expansion petered out in June with GDP growth of 0%, suggesting a loss of economic momentum toward the end of the quarter that has left some worried about downside risks ahead.

“Downside risks to GDP growth remain significant, as the labour market appears set to continue to gradually loosen,” said Michael Brown, a senior research strategist at Pepperstone, a retail broker headquartered in Australia.

Above: Interbank reference rates for Sterling relative to G10 currencies on Tuesday. Source: Netdania.

“Meanwhile, fiscal policy also looks set to tighten notably in the fourth quarter, as Chancellor Reeves seeks to deliver further spending cuts and sizeable tax rises - aka, an effective return to austerity,” Brown added.

The data draws a line under the technical recession seen in the second half of last year but also reminds of lingering downside risks to the outlook, particularly as the breadwinning services sector contracted anew in June.

“At the margin, this may give the Bank a bit of reassurance that the recent strength of activity won’t prevent further falls in services inflation,” Capital Economics’ Ashley Webb said of the data.

“Today’s release, together with fading services inflation in July, lends support to our view that interest rates will be cut from 5.00% now to 3.00% by the end of next year,” he added.

Thursday’s was the latest in a growing line of positive economic reports to emerge from the UK, which includes softer-than-expected inflation figures out on Wednesday and better-than-expected employment numbers released on Tuesday. The next local calendar highlight is retail sales data for July on Friday.

Above: Pound to Dollar rate shown at daily intervals alongside Pound to Euro rate.