The UK’s second quarter GDP figure showed economic growth of just 0.2%, in line with median forecasts. The figure is very disappointing but sterling has enjoyed a boost as a result, with the market seemingly relieved that a weaker figure was avoided.
Richard Driver, analyst for Caxton FX, said: “A 0.2% quarterly growth is very poor indeed but the growth figures in the past three months suggested as much. With growth in the previous two quarters dead flat, the longer-term picture of the UK economy is pretty bleak. Manufacturing, industrial production and retail sales growth has slowed particularly badly in recent months but in truth the situation is pretty dire across the board. The Royal Wedding bank holiday will have had some impact, as will the disruption to global trade patterns caused by the Japanese earthquake.
“Sentiment towards the UK economy is rightfully very negative. The financial markets value fiscal conservatism and deficit-reduction but fears that the UK economy will dip back into recession are mounting with every poor growth figure.
“The Bank of England [BoE] certainly can’t raise rates in light of this morning’s GDP figure and I’d be very surprised to see a rate hike this year. Even if UK inflation ticks up in line with expectations, the MPC is more dovish than ever at present. Poor growth, high debt and ultra-low interest rates are a recipe for a weak currency and these are the factors that have driven the pound so low. The fact remains that a weaker pound is positive for Britain’s exporters.”
Driver concluded: “Frankly, I’m surprised the figure wasn’t even lower and it looks as if the market was too because sterling has climbed by half a cent against both the euro and the US dollar. Sterling looks hard-pushed to hang on to this morning’s gains against the euro. With 2 August deadline for a solution to the US debt ceiling issue fast-approaching, sterling may well be able to make further gains against the greenback.”
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