Sterling firms despite latest growth figures

The pound has recovered from its initial negative reaction to the release of another alarming set of GDP figures at the end of last week where the UK economy fell at a rate of 0.8% in the second quarter, far worse than consensus.

After a sluggish start to this week’s trading, sterling has since recovered its composure. Poor German data yesterday, where annual inflation turned negative for the first time since reunification in 1990, has further boosted the recovery in the pound and we are currently trading back at four week highs against the single currency close to €1.1750.

A slightly different tale to tell where the US dollar is concerned where a sudden decrease in investor risk appetite has seen the dollar gain across the board as it takes on its customary safe haven status. That said, the pound sits only a little over 1% off its year highs set towards the end of last month and over 20% off the $1.35 lows posted at the beginning of the year.

While these latest developments are encouraging for sterling generally, and may finally be the catalyst required for a renewed assault on the psychological 1.20 level against the euro, the more risk adverse environment is unlikely to provide a platform for fresh nine month highs against the dollar.

Next week brings the latest Bank of England MPC meeting where interest rates are almost certain to remain at 0.5% but all eyes will be on the committee’s decision regarding quantitative easing. Last month’s decision to pause the asset purchase program came as a surprise to many and the latest set of GDP data will only increase the expectations that the Bank will vote to expand the program next week.

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