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UK GDP an inflection point for Sterling

UK 2nd quarter GDP has come in line with expectations at an unchanged 0.3% q/q from the first reading. Perhaps more significantly, separate figures show total business investment in the UK has stalled to zero after 0.6% previously.

Although the headline figure remains the same, there has been some shuffle amongst the internals. Perhaps most worryingly, consumer spending has risen 0.1%, the least since the 4th quarter of 2014. Increased government spending made up some of the deficit while net trade had no impact.

Signs that Brexit could be weighing on business confidence have made the growth figures a potential inflection point for the British pound. The pound tumbled Thursday morning with soft GDP and investment figures adding to concern about Theresa May’s ‘hard’ approach toward the European Court of Justice. This month GBPUSD has tumbled nearly 4% from yearly highs whilst EURGBP hit 8-year highs this week.

Sluggish growth adds credence to the notion of the UK economy nearing a Brexit-induced cliff-edge. Recent signs of falling business confidence become of particular concern when they translate into the ‘hard data’. Nonetheless, while UK growth trudges along at a slow pace, the Bank of England will view it as offset by above-target inflation. The decision whether to raise rates is still finely balanced and we expect the Bank of England to continue to do what they know best, nothing.

The worrisome domestic picture adds to outside factors that could play against the pound like Fed policy normalisation and tapering by the ECB. The next clues with this regard may come from speeches by Federal Reserve Chair Janet Yellen and ECB President Mario Draghi at Jackson Hole on Friday.


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