UK GDP Gives Sterling A Boost

Tuesday followed what was a quiet start to the trading week but at least gave the chance of some juicy data for traders to go on in the form of UK GDP.

This was the first reading for Q2 so was eagerly anticipated following the poor first quarter results. The forecast was for an increase from the previous quarter, which was 0.4 percent, with analysts expecting a 0.7 percent reading, despite a drop in the year on year figure. The forecasters were correct and although this normally gives little change to the exchange rates, as we normally have a level of “pricing in” it seems that markets felt differently. Having initially when the reading came out, the pound didnt change, we subsequently saw a rally across all its major pairings, taking a cent from both he euro and the US dollar.

The main reason for this is twofold. Firstly, the reading gives the impression that the slowdown seen in Q1 was a glitch, caused by temporary economic factors and not the start of a decline in UK growth overall. Secondly, the reading shows GDP per capita is back to its pre-recession peak, which was back in Q1 2008, giving further strength to the Bank of England’s case about raising interest rates, which has been talked about again recently as early as the beginning of 2016, with some more bullish analysts stating could be as early as Q4 this year.

As our regular readers will know, interest rates are the main driver of exchange rates, as it boils down to the yield an investor will get on buying said given currency. If the UK’s interest rates are talked about rising, given what a solid performer the pound is anyway, will give investors even more reason to buy up pounds making it more expensive and therefore increasing its strength. Good news for those looking to send money overseas, but bad news for those looking to repatriate foreign funds back to the UK.

Following lunch, focus shifted across the pond as we saw a few US releases including the lower than expected consumer confidence figure for July and Markit services PMI coming out slightly better than forecast. Having traded in a 30 point range most of the day, the mixed data had little effect as markets sided with sterling for now ahead of the Fed interest rate policy meeting tonight.

So today as mentioned it’s the Federal Reserve’s turn to make waves over interest rates as their policy meeting and statement is released at 7pm UK time. Before that we have UK money supply data, consumer credit and mortgage approvals this morning followed after lunch by US home sale and mortgage data ahead of the Fed meeting. With the key release coming tonight, it could be a volatile day for trading, where we could see investors take some short term profits from the gains made yesterday. If so, expect the pound to drop. If you have a requirement coming up and missed the opportunity to trade yesterday, make sure to give one of the CI team a call today to avoid potential disappointment.