Pound slumps even though fourth-quarter GDP beats forecasts

Uncertainty over the UK’s economic outlook, despite upbeat GDP figures, saw the pound unable to hold on to its early morning strength on Friday.

The pound is on strong form versus the high-yield currencies this morning, but is struggling against its safer peers. GBP/EUR is currently flat at €1.1385, while GBP/USD has fallen -0.2% to US$1.4122. GBP/AUD is up 0.2% to AU$1.7466, GBP/NZD up 0.3% to NZ$1.9277, and GBP/CAD up 0.2% to C$1.7440.

Read on to find out why, despite better-than-expected GDP figures, pound Sterling surrendered its gains at the end of the week…

What’s been happening?

The pound had raced higher at the start of trading on Friday morning, but the strong gains recorded by Sterling proved unsustainable and GBP had weakened back towards opening levels by the end of the day.

Fourth-quarter gross domestic product data for 2017 failed to impress markets, despite beating forecasts by 0.1% both year-on-year and quarter on quarter.

The Office for National Statistics (ONS) warned that the outlook for the dominant services sector remained cloudy and, even with the surprise acceleration in growth compared to Q3, this was still the worst annualised performance recorded since the beginning of 2013.

Furthermore, even though the euro and US dollar were weak elsewhere, Sterling was not able to hold onto its morning advance.

Markets are feeling cautious on the euro after Thursday evening’s comments from European Central Bank (ECB) President Mario Draghi in which he warned the US not to attempt to talk the US dollar lower, as this could lead to a currency war.

Meanwhile US GDP data for the fourth quarter saw a much sharper than expected slowdown from 3.2% to 2.6%, and the advance goods trade deficit also printed poorly, unexpectedly widening to over -US$70 billion.

What's coming up?

There is no UK data set for release today, but the UK’s political sphere never remains quiet for very long, so there could always be developments regarding Theresa May’s leadership or the Brexit negotiations to strengthen or undermine appetite for the pound.

The only developments on the Eurozone data calendar today are speeches from ECB officials Sabine Lautenschlaeger and Benoit Coeure.

Meanwhile the Federal Reserve’s preferred measure of inflation - personal consumption expenditure readings - are set for release early this afternoon. Signs of strengthening consumption would boost the odds of an interest rate hike in March and also improve the longer-term monetary policy outlook, which would send the US dollar higher.

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Reaz Rahman
Senior Dealer

Reaz, our Senior Currency Dealer, joined us in January 2015. Reaz draws on his detailed knowledge of the foreign exchange markets to help customers to choose the right service and time to transfer.