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UK May growth numbers disappoint, but traders shrug it off, go long sterling

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Reopening can’t come soon enough: UK GDP expanded by a meagre 0.8% in May, led by indoor hospitality, but held back by a global chip shortage hitting car production. The monthly growth rate was below the 1.5% forecast and leaves the economy 3.1% below its February 2020 pre-pandemic size.

Commenting on lower-than-expected UK GDP figures and sterling under pressure, Jesús Cabra Guisasola, Associate at Validus Risk Management, said: “The UK economy grew 0.8% in May (vs 1.5% estimated). These figures are coming in lower than the consensus and compared to the April print of 2.3% signal the peak of the recovery is now behind the country, with a path for steadier growth in the coming months.”

He added that looking ahead, risks continue to be on the table with the country heading towards the last stage of the reopening on 19 July, which could help the delta variant to spread more rapidly.


Markets shrugging off negativity

Despite the poor numbers, the FTSE 100 was up 0.77% in early trading Friday in the UK. The equity market seems to be shrugging off the negativity. The Nikkei 225 was off 0.63% overnight largely it seems on news about new restrictions for the forthcoming Olympic Games.

Forex traders were also positive on the GBP. The pound was up against the USD Friday morning and the Euro. Traders seem to be taking the view that the figures reflect historic performance of the UK economy, and not the opening up that has been occurring over the last month or so.

In the FX market, sterling remains under pressure versus the dollar, with the pair dropping from $1.42 in early June to trade below the $1.38 mark.

“Today’s data serves as a further reminder that the UK economy is not out of the woods just yet,” added Ian Warwick, Managing Partner with Deepridge Capital. “We are however clearly moving in the right direction and as we focus on economic recovery, it remains critically important that scale-up businesses, particularly in high-growth sectors such as digital technologies and life sciences are supported; as they will be at the very heart of economic growth as we create an economy fit for the twenty-first century.”

Sterling has been trending down against the USD since early June. It has slumped from almost 1.42 as the euphoria of the vaccine roll out started to wear off in the face of the rapid spread of the delta variant in the UK. We have seen two smaller rallies on the GBP/USD pair, one on 21-23 June, and a smaller rally earlier this week. In both cases the rallies in GBP lasted around 48 hours.

Over the three month picture the pound has effectively given up almost all its gains against the dollar since early April with the fillip provided by the reopening program largely gone now from the currency. It is to be hoped that June numbers for the UK will look stronger. The fact that we see some short term buying of sterling today (Friday) is partly reflective of the fact that much of the drop in output has been priced in.

Next month’s will be a more accurate measure of whether May was just a blip or more of a trend. While the economy is reopening, many sectors are still performing well below pre-pandemic norms.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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