UK GDP Fails to Inspire Pound Sterling

UK economic growth data confirms the economy saw growth accelerate into the second quarter of 2017.

The ONS reports the economy grew 0.3%, which met economist expectations and ensures the reaction by Sterling is more or less minimised.

The GBP to EUR exchange rate is seen trading at 1.12 following the data while the GBP to USD exchange rate is at 1.3007.

"Given its backward looking nature we anticipate only limited market impact, especially as the main focus should be on next week’s BoE monetary policy announcement & inflation report," says Manuel Oliveri, FX Strategist with Credit Agricole.

Much of the growth in the economy was largely due to expansion in the dominant services sector which expanded by 0.5%, up on the 0.1% growth recorded in the first quarter.

However, there was a worrying 0.5% decline recorded in manufacturing activity while the construction sector recorded a whopping 0.9% decline. We find this interesting as the official figures vary greatly from the PMI data delivered over the second quarter which suggested these two sectors were growing at a decent clip.

"While the UK has posted it’s 18 straight month of growth, it’s hardly moving at a rate of knots and the foundations for further expansion look shaky. The UK appears to be heading towards unsavoury levels of inflation and business conditions are struggling amidst heightened Brexit uncertainty," says Dennis de Jong, managing director at UFX.com.

Other economic data out this week has been broadly positive.

The CBI reported earlier in the day that production among UK manufacturers grew at the fastest pace since January 1995 in the three months to July.

This suggests the third quarter will have enjoyed a positive start.

According to the latest quarterly CBI Industrial Trends Survey, employee headcount increased at the fastest rate for three years and that hiring intentions for the coming quarter also improved.

The news is evidence that the UK economy might be seeing its manufacturing sector picking up some of the economic slack being left behind in the wake of slowing consumer activity.

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Sterling's Rebound 'Technical' in Nature

Yes, downside pressures have eased ahead of the mid-week session but the strength is hardly convincing and lends support to the idea that the currency is playing second-fiddle to its major trading partners.

For instance, the Euro is taking a breather from its frantic run higher, while the US Dollar sits in anticipation of the US Federal Reserve meeting on Wednesday.

“Sterling staged a technical rebound against the Dollar and the Euro,” says Piet Lammens, a foreign exchange analyst with KBC Markets in Brussels who describes the move as insignificant.

Meanwhile analysts at Deutsche Bank have told clients it is their "house view" that the Euro is likely to appreciate a further 5% against the Pound.

"We turned more positive on Euro," say Deutsche Bank in a publication released July 25. "Limit to Sterling downside vs. Dollar as BoE uncomfortable with weak Pound. But currency uniquely exposed to earlier / faster ECB tightening − G10’s largest current account deficit, lowest real rates."