GBPUSD rallies marginally

Recession fears recede in the UK following a strong upwards surprise in July’s growth figures, but notes of caution are plentiful in the report as Brexit keeps optimism capped.

Today’s release saw the UK economy grow by 0.3% MoM in July, lifting the rolling three-month average to neutral territory following a contraction in Q2. In normal times, a significant reaction in economic growth following a transitory event-driven contraction would prompt substantial positivity in financial markets, however, the reaction seen today highlights the underlying political uncertainty on the horizon. The Head of GDP at the ONS was right to reference the likely slowdown in the service sector through to the end of 2019, and given that growth in services carried the expansion in July, the underlying tones of today’s report shouldn’t fill investors with confidence - especially given the negative surprise in August’s service sector PMI.

With a potential snap election, Brexit extension, and even a hard-exit from the EU on the cards for the UK economy in the second half of the year, recession fears should remain prominent in the market’s focus. The last time a credible exit date in the UK surpassed, back in March, the UK economy contracted some 0.5% in the following month. This dragged down the Q2 reading and a similar sharp contraction in the UK economy could easily offset the rebound in growth highlighted in July this morning. The tentative optimism is best seen in sterling this morning, which popped its head into positive territory following the release but hasn’t extended the rally towards Friday’s highs.

Chart: GBPUSD rallies marginally off of the positive beat in GDP data as Brexit keeps optimism capped