UK GDP Tapers Pessimism not QE

The UK economy grows 0.6% q/q in Q2, posting the first consecutive quarterly positive growth in over 2 years. This time, however, there are no […]


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By :  ,  Financial Analyst

The UK economy grows 0.6% q/q in Q2, posting the first consecutive quarterly positive growth in over 2 years. This time, however, there are no Olympics or Royal Wedding to help with the figures, but mostly services sector-led growth. Even construction and manufacturing entered positive territory, rising 0.9% and 0.4% respectively. The ONS wasted no time to remind economic growth remains 3.3% below the pre-crisis peak.

Both of the UK’s Purchasing Managers’ indices for services and manufacturing exceed their counterparts in the US, China, Eurozone and Germany. The last time this had happened was in 2011, and only for one month. Today, UK’s services PMI is at its highest since March 2011 and manufacturing at its highest since April 2011. Meanwhile, jobless claims are at their lowest level since June 2010.

Yields on 10-year gilts are at 2.40%, just under those in Canada and the US at 2.47% and 2.60% respectively, but above their German and Japanese counterparts of 1.67% and 0.80% respectively.

With the Bank of England going as long as 13 months without increasing monthly asset purchases, such relative policy positioning is becoming increasingly positive for the currency, especially as UK data hovers from neutral to positive.

Next week’s BoE statement is widely anticipated to maintain its unanimous vote in favour of keeping rates and asset purchases unchanged. The accompanying statement is likely to contain more implicit forward guidance with respect to rates remaining low, especially after the MPC made first least hawkish vote (unanimous rejection of further QE) since October.

Communicating the recovery and stressing the need for ample progress ahead as well as playing down the threat from inflation will be the BoE’s main message. This will be followed by more “forward guidance” from Carney at next month’s inflation report, when markets should anticipate the addition of a dual mandate, aimed at deflecting attention from inflation and justifying he status quo on asset purchases.

GBPUSD is expected to make another attempt towards $1.55, where it will likely encounter stiff resistance at the 200-day moving average. This technical level proved a durable barrier last month but it’s likely to come under severe test this time around, until greater resistance emerges at $1.57.

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