Sterling pegged back despite impressive GDP growth data

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27 January 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound lost ground against its major peers on Thursday, erasing some of its gains from earlier in the week that have put the UK currency on course for its best fortnightly performance against the US Dollar in 10 months.

I
nvestors booked profits after a sharp rally in Sterling in the past week or so following Theresa May’s comments that parliamentary approval will be required on the final terms of the UK’s EU exit deal. This erased very brief gains for the currency early on Thursday following the release of a strong set of GDP numbers. The UK economy grew by 0.6% in the final three months of last year, due in part to a rebound in manufacturing activity following an underwhelming performance in the third quarter.

Meanwhile, the US Dollar retraced some of its losses, recovering from its seven week low against its trade-weighted basket. Higher global bond yields and the Dow Jones index topping the 20,000 mark for the first time led to a general improvement in investor appetite. Yesterday’s services PMI also came in well above expectations on Thursday, providing a further boost to the greenback following a number of days under pressure on the back of Donald Trump’s protectionist rhetoric.

A strong showing for the Dollar sent the Euro to its weakest position so far this week with the single currency slumping by almost one percent against the greenback. With no significant economic announcements in the Eurozone today, the path of the Euro in the coming days is likely to be driven by next week’s Federal Reserve meeting.

Major currencies in detail

GBP

The Pound fell by 0.5% against a resurgent US Dollar on Thursday, although remains over 4% higher versus the greenback over the past two weeks.

Yesterday’s growth data was fairly impressive across the board. The UK economy grew by 0.6% in the final quarter of 2016, beating expectations for a 0.5% expansion, with GDP growing by 2.2% on a year previous. As has become the norm in the UK, growth was driven largely by strong consumer spending and a 0.8% expansion in the services industry, of which accounts for around two-thirds of the UK’s overall economic output.

With no economic data out of the UK at all today, investors will be looking out for any headlines from Theresa May’s first meeting with US President Donald Trump in Washington. Trade is expected to be at the forefront of discussions today with any positive news likely to provide good support for Sterling this afternoon.

EUR

A strong US Dollar sent the Euro 0.75% lower for the day on Thursday.

There was little in terms of economic data in the Eurozone to support the Euro. German consumer confidence did come in above expectations, although did little to shift the single currency. Confidence rose to 10.2 from the 9.9 recorded a month previous. This was due largely to a general improvement in economic conditions in the country, including multi-year low unemployment.

French GDP numbers this morning and German import prices will be the main economic data releases today. Investors will have one eye on next Tuesday’s inflation and GDP numbers.

USD

The Dollar recovered ground on Thursday, largely due to a rebound in stocks and bond yields. The US Dollar index ended London trading 0.7% higher.

Yesterday was a busy day in the US in terms of economic data. The services PMI rose sharply above expectations. The index increased to 55.1 from 53.9, its fastest pace in almost a year. This bodes particularly well for first quarter growth in the US, particularly given the services industry makes up around 80% of overall output.

Moreover, jobless claims remained around decade low levels, albeit rising to 259,000 last week. New home sales were the only major miss, declining sharply by over 10%, its largest drop since March 2015.

Today will be a busy day in the US, with Trump’s meeting with Theresa May likely to take centre stage. The initial estimate of fourth quarter GDP could also prove a market mover if we see a significant divergence from the 2.1% estimate.

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