Positive Q2 GDP figure unable to lift sterling

Running against expectations, data this morning revealed that the UK's rate of economic growth in the second quarter was revised up to 1.2%.

The broad market consensus had called for a confirmation of the already impressive original 1.1% estimate. The upside surprise is certainly encouraging news for the prospects for the UK recovery, but it is likely to mark the peak of the four quarters. With spending cuts and tax rises imminent, the remaining half of the year is likely to bring weaker economic growth. Up to this point, survey evidence for July and August points toward sustained domestic demand and manufacturing sector strength.

However, the data was not all positive, with business investment in the second quarter in negative territory. This appears to have offset the GDP figure with sterling struggling to sustain its level above €1.22.

Duncan Higgins comments, "The upward revision is certainly an encouraging sign that the UK economy is moving further away from a dip back into recession. It's also in line with a run of stronger figures seen from the UK recently, which suggest positive growth in the third quarter."

Following the announcement, sterling has failed to realise any gains.

"The 0.1% upward revision is not going to alter any views within the Bank of England. Until the impact of the government's spending cuts on the economy is realised, the Bank will remain extremely cautious. Governor Mervyn King has reiterated his promise to keep monetary policy loose to accommodate the austerity measures and the market is fully aware that today's revision is not going to impact his thinking," continues Higgins.

Ahead of the long weekend, sterling is slightly on the defensive today and has edged marginally lower against most of its peers.

Higgins concludes, "With the US GDP revised estimate still awaited as well as Bernanke's key speech, the pound is unlikely to hold above $1.55 going into the weekend."