British Pound Edges Higher After GDP Surprise

 | Aug 11, 2023 05:31AM ET

The British pound is slightly higher earlier on Friday. In the European session, GBP/USD is trading at 1.2706, up 0.24%.h2 UK GDP surprises to the upside/h2

The week wrapped up on a high note in the UK, as the economy grew by 0.2% q/q in the second quarter. The gain was indeed modest, but it beat the consensus estimate of zero growth and the first quarter reading of 0.1%. The struggling UK economy thus managed to elude stagnation. Another good piece of news was that June GDP climbed 0.5% m/m, above the estimate of 0.2% and rebounding from the May reading of -0.1%. This is the highest monthly growth rate since October 2022.

The Bank of England has had a rough time in its battle with inflation, despite raising interest rates to 5.25%, the highest level since February 2008. Inflation stands at 7.9%, the highest in the G7 club and nowhere near the BoE’s target of 2%. The slight improvement in economic growth will be welcome news at the Bank as there is a real concern that the combination of rising rates and a weak economy could result in a recession.

The market’s reaction to the GDP release was muted. The British pound rose about 40 basis points after the GDP release but pared most of these gains.

h2 US inflation report likely cements Fed pause/h2

The July US inflation report was an interesting mix. Headline CPI accelerated for the first time in 13 months, with a reading of 3.2%. This was higher than the 3.0% gain in May and just shy of the consensus estimate of 3.3%. The upswing didn’t result in any swings from the US dollar or the equity markets, as CPI was expected to rise due to base effects.

Core CPI, which is more important for the Fed than the headline indicator, ticked lower to 4.7% in July, down from 4.8% in June. On a monthly basis, the core rate climbed by 0.2% for a second straight month. If this trend continues, core inflation will fall significantly.

Perhaps the most important takeaway from the inflation report is that it should cement a pause from the Fed in September. The odds of a rate hike fell to just 10% after the inflation release, down from 0.14% prior to the release, according to the CME FedWatch tool. Is the Fed’s rate-tightening campaign finally over? That question is yet to be answered, but a pause in September will lead to increased expectations about rate cuts in 2024.