The British pound surged sharply yesterday against the greenback after the Office for National Statistics (ONS) published better-than-anticipated GDP growth in July. The positive GDP data comforted the market, which was worried about recession ahead of the UK’s exit from the EU on October 31st. From a low of 1.2233, the GBP/USD pair rallied more than 150 pips to reach a high of 1.2384 in the past 24 hours.
In July, the UK’s GDP grew 0.3% on an m-o-m basis, after remaining flat in the earlier month. Economists had anticipated only a growth of 0.1%. The expansion was led by a rebound in the services sector.
Rob Kent-Smith, Head of GDP, explained the impact of the services sector on the economy and the reason behind the narrowing of the trade deficit. He believes that the rate of economic growth is heavily dependent on the outcome of the likely general election in the UK and its impact on Brexit. Rob Kent-Smith also feels that the growth of the services sector, although rebounded in June, will remain sluggish in 2019.
“GDP growth was flat in the latest three months, with falls in construction and manufacturing. While the largest part of the economy, services sector, returned to growth in the month of July, the underlying picture shows services growth weakening through 2019. The trade deficit narrowed due to falling imports, particularly unspecified goods (including non-monetary gold), chemicals and road vehicles in the three months to July.”
The surprising GDP figures indicate that the country has not entered into a recession, according to Paul Dales, an economist at Capital Economics. The economist anticipates an underlying growth rate of about 0.2%.
While the production index rose 0.1%, services grew 0.3% in July. Likewise, manufacturing production increased 0.3% m-o-m in July, after contracting 0.2% in June. Economists had anticipated manufacturing production to contract by 0.2%.
After contracting 0.7% in June, the construction sector made a strong comeback with a growth of 0.5%. Analysts had anticipated construction sector growth of 0.2%.
GDP remained flat in the July quarter, compared with a contraction of 0.2% in the March quarter.
Another ONS report indicated that the trade deficit widened to £9.14 billion in July, from £8.90 billion in June. Trade-in services indicated a surplus of £8.90 billion compared with a surplus of £8.78 billion in the earlier month. The total trade balance indicated a shortfall of £219 million in July, compared to a deficit of £132 million in June.
The positive GDP data is expected to keep the pound bullish in the short-term.
The historical price chart indicates that the GBP/USD pair has made a double bottom at 1.2030 levels. Furthermore, there is also a bullish hammer candle pattern (marked by the orange circle) formation. The oscillator of the moving average is also having a positive reading. As a result, we can expect the currency pair to remain bullish in the short-term.
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