Outlook for Pound Positive as CBI Confirm UK Growth is Accelerating

Above: The CBI's Rain Newton-Smith says the strength of the GBP may be hindering export activity.

After a poor end to May the British pound looks set to walk into June with a strong set of economic data behind it.

UK economic growth is accelerating reports the CBI Growth Indicator which has reached a 12 month high. Confirmation that the UK economy continues to grow will likely keep the pound sterling bid for the remainder of the year.

The CBI data - which shows a reading of +33% for the three months to May - comes after the pound fell sharply against the euro and US dollar in the final sessions of the month. With the UK economy continuing to perform strongly we are of the opinion that dips should be shallow and corrective in nature.

At the start of the new trading week the pound to euro exchange rate (GBP-EUR) has put the dour May finale to bed and has risen 0.6% on Friday's close, the conversion is at 1.3994. The pair reached a high of 1.4173 in the previous week.

The pound to dollar exchange rate (GBP-USD) is lower however with a conversion at 1.5265 at the time of this Monday morning update, the pair hit a high of 1.5507 in the previous week.

Be aware that the currency rates referenced above refer to the wholesale markets, when you make an international payment / transfer your bank will offer you a rate at their discretion. However, using an independent FX provider will get you closer to the market rate, in some instances this results in up to 5% more FX being delivered, find out how.

A Solid Base for the British Pound

The exchange rates market remains a slave to economic data - it is improving economic data that will ultimately prompt the Bank of England into raising interest rates. Rising interest rates attract currency flows which will push the pound exchange rate complex higher.

According to the CBI’s latest Growth Indicator - growth quickened in all three main sectors. It was modest in the manufacturing sector, and strong in the retail sector, but business & professional services was the stand-out performer.

This once more confirms just how important the services sector is to the UK economy. The strength of the British pound continues to hamper the manufacturing export market it appears.

The Growth Indicator, derived from CBI surveys of 811 businesses, brings together economic activity data from a range of business sectors. The reading of +33% for the three months to May was sharply up on the three months to April (+19%). And is the highest balance since May 2014 (+35%).

The balance of expectations for output growth over the next three months (June – August) is +30%. That is the strongest expectation since August last year (+38%).

Rain Newton-Smith, CBI Director of Economics, said:

“As we move through the second quarter, growth has cranked up several gears and businesses expect that faster pace to continue. This supports our belief that the weaker-than-expected GDP growth in the early months of 2015 will be short-lived.

“A stellar increase in activity in the business and professional service sector and retail sales bounding ahead are clear indications of strong business and consumer confidence and increased spending power.

“UK exports are likely to be helped by renewed momentum in the Euro area but the stronger pound and weak demand in many overseas markets continue to pose challenges.”

Watch Out For . . .

The new month brings with it new data. We will digest Manufacturing PMI on Monday followed by the Construction PMI on Tuesday and the Services PMI mid-week. We will need to see the Services PMI beating expectations if the pound is to stand a chance of delivering a 2015 best agianst the euro. Bulls will also be hoping the data can put a line under the recent losses against the dollar.