Sterling Retreats as U.K. Economy Extends Lackluster Performance

  • Pound may be driven by dollar moves after Fed rate decision
  • Economy experienced ‘notable slowdown’ in first half: ONS

U.K. Economy Grew 0.3% in Second Quarter

The pound reversed an earlier advance against the dollar and gilts rose after data showed the U.K. economy extended its lackluster performance into the quarter through June.

The Office for National Statistics said the economy experienced a “notable slowdown” in the first half, reporting a modest 0.3 percent increase in gross domestic product for the period. The growth figures follow last week’s data that showed inflation unexpectedly slowed in June, damping expectations for monetary tightening by the Bank of England. The central bank’s next policy decision is on Aug. 3.

  • GBP/USD fell to 1.3007 from as high as 1.3042 before the data; it traded at 1.3020 as of 10:03am in London
  • First-quarter growth was “poor at 0.2%, making Britain the most sluggish G-7 economy, and today’s slightly stronger 0.3% GDP reading for Q2 can barely be described as a bounce back,” Dennis de Jong, managing director at UFX.com, writes in note
    • “The weaker pound is continuing to drag consumer spending down and it’s hard to see growth gaining any momentum heading into the second half. The U.K. appears to be heading toward unsavory levels of inflation and business conditions are struggling amid heightened Brexit uncertainty”
  • Growth in the second quarter was led by services, which rose 0.5 percent and was the sole positive contributor
  • The GDP numbers “were a little bit of a disappointment,” said Richard Falkenhall, senior strategist at SEB AB in Stockholm. “I never believed in a BOE hike based on my more pessimistic view on the U.K. and this growth number gives more support to my view. Also the inflation rate actually came down a little bit so it will not give the BOE more support for a hawkish view”
    • Falkenhall predicts a 6-2 outcome for the meeting next week for the BOE to keep rates on hold
  • The pound may be driven by moves in the dollar later Wednesday, when the Fed announces its interest-rate decision
    • Fed expected to keep its benchmark rate unchanged at 1.00%-1.25%, according to a Bloomberg survey of analysts
  • Ten-year gilt yields -3bps to 1.23%
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