It’s been a long time coming, but the UK’s first quarter GDP figure was released this morning, revealing a growth figure of 0.5%. This put it bang in line with consensus – a surprising fact in itself – which proved sufficient to give the ailing pound a much needed nudge higher.
When broken down, the figure is relatively encouraging. Had it not been for a disappointing construction sector reading, the figure may have been substantially higher with both manufacturing and services on a firm footing in the opening three months. From sterling’s perspective the key focus is whether the GDP data will swing any MPC voters across to the hawkish ‘let’s raise interest rates’ camp.
Unfortunately, I think this is still some way off. Taken together with the previous quarter, the UK economy has not grown in the past 6 months (albeit it hasn’t contracted either). I doubt that the dovish leaning members of the MPC will take too much encouragement from that fact. A sustained run of stronger economic signals needs to be seen before we can rekindle hopes of a summer interest rate rise.
Nonetheless, sterling has recovered from its pre-release lows. Owing to rumours of a much lower GDP number, the pound has only managed a recovery to just short of €1.13. Looking ahead however, we have reason to suggest that the pound has found its elusive bottom. Sterling may still be some way from embarking on a steady recovery, but I don’t think we’ll see any fresh lows set.
Upward momentum from here will be decidedly protracted. In broad terms, the UK currency is still out of favour and the euro remains seemingly untouchable. Even amid a growing chorus surrounding a Greek debt restructuring, the euro is holding steady, plugging fresh 15-month highs against the US dollar. However, the pound is hugely undervalued and with a few more encouraging figures, sentiment should begin to swing. The standard monthly PMI figures are due next week (services, manufacturing, and construction sectors) and will provide the first signs of economic health in the second quarter.
Whilst this blog has focused on the pound’s fortunes against its multi-nation neighbour, it must be noted that sterling is making consistent gains against the US dollar – the worst performing G20 currency at present. Clinging tight to the coattails of the euro/dollar pairing, we could yet see $1.67!
