Start of new rally as UK GDP confirms growth?

The British Pound strengthened after data showed the UK economy expanded again in the second quarter yesterday. GDP growth of 0.7% gives credence to notions put forward by the Bank of England that there could be an interest rate hike before the turn of the year. The news sparked a small relief rally in GBP/USD as the pair recovered all of its Asian session losses.

The UK Q2 GDP figures were as expected with year-on-year gains printing at 2.6%. Mining and quarrying posted the biggest gains since 1989, but manufacturing declined the most since Q1 of 2013. On the other hand, industrial production rose the most since 2010.

There were no glaring problems in the UK GDP report as the country recorded steady growth in Q2 that should provide support for normalization of monetary policy sooner rather than later. It is still unclear whether the BoE would consider hiking rates ahead of the Federal Reserve, but given yesterday’s sound data there is little fundamental barriers to hike rates before the year end.

GBP/USD popped on the news hitting a high of 1.5585 interbank (IB) in post release trade as market participants were relieved that there were no downside surprises in the report. Prior to the news, the pair saw heavy selling that pushed it lower towards the 1.5525 IB level.

As one of the only two G-20 currencies developing a tightening monetary bias, sterling should begin to see more speculative flow into the pound as traders start to price in the prospect of a rate hike before the year end. The data may be the catalyst to start another rally to test the recent highs at 1.5800 IB as the correction of the past few weeks appears to be over.

Tuesday saw the euro retrace some of the gains it made over the last week, weakening over 0.65% against the pound. There were no economic releases behind this retracement, which was most probably a sign of market noise, and the markets remain volatile within a relatively wide range seen over the previous few weeks.

German consumer climate data at 10.1 figures was released this morning, offering a further insight towards the economic health of the eurozone by determining the financial confidence of the area.
This result came out exactly as expected, so had little direct effect on the euro. Having said this, the result this time last year was 1.1 points lower at 9.0, demonstrating the improving financial confidence and strength in the European Union in the last 12 months.

Tomorrow will offer further guidance towards the economic health of the region with the release of German Spanish and Italian data.

It was a mixed day for US fundamentals yesterday, with Markit’s services PMI data coming in above expectations for the current month, whilst the consumer confidence and the S&P/Case-Shiller index both disappointed. Positive GDP figures out of the UK curtailed any chances of dollar gains against the pound, which finished the day 0.4% higher. EUR/USD did, however, manage to claw back some of its most recent gains, finishing the day 0.35% lower. The dollar appears to be shrugging off US fundamentals this week as we eagerly await tomorrow’s FOMC statement. This will no doubt give us a better indication over the timing of the next US rate hike. Many are viewing this as the last meeting before we see a rate rise, so it will be interesting to see what is said.

As discussed, the main focus today will be on the Fed’s FOMC statement out at 19:00, although do look out for pending home sales out at 15:00, which will give us an overview of the health of the US housing market.