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Pound strength supported by positive UK growth surprise

The UK’s Gross Domestic Product grew by 0.5% in the 4th quarter according to a preliminary estimate released today. This is better than expectations of 0.4% q/q. The annualised figure was forecast to have dropped to 1.4% from 1.7%, came in at 1.5%, still the lowest in 5 years. That brings the 2017 economic growth rate to 1.8%, down from 1.9% in 2016, not too shabby at all, especially against such dour consensus forecasts.

 

Sector-by-sector there has been some clear divergence within the British economy. The all-important service sector is growing at about the same pace as the headline figure while industrial production grew over 1% at the same time construction fell by a similar amount.

 

Taking the economy as a whole, the British economy has retained a steady pace of growth, which has been slower than other G7 counties, but far exceeding gloomy Brexit-related forecasts. Today’s data is another positive surprise for the economy that puts pressure on the Bank of England to raise interest rates for a second time sooner rather than later. The BOE is looking for 2-3 further rates hikes over a 3-year period. Solid economic growth and low level of unemployment support our call for the second BOE rate hike to come in Q2 of this year.

 

BOE Governor Mark Carney was on the wires before the data was released at Davos. Carney sees Brexit uncertainty as the reason growth in other developed countries is outpacing the UK. We disagree; growth is just cyclical. The UK had the fastest pace of growth in the G7 and has just slipped down the pecking order as other economies catch up. If anything Brexit, via the inflationary impact of the drop in the British pound has exposed the UK economy’s over-reliance on consumer spending.

Sterling shot up after the data but couldn’t sustain the strength. GBP/USD has gained over 2% so far this week, reaching a high of $1.434. President Trump’s comment that the US dollar will get “stronger and stronger” could be the beginning of a bout of profit taking into the weekend. Despite the potential for a selloff, the $1.40 level has established itself and while that remains the case, our bias remains bullish on cable.

 

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