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British Pound Rises as UK Economy Outperforms During COVID-19, but Set for Worst Quarter Against Dollar in a Year

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The pound experienced a boost on Friday following the release of data showing that the British economy grew at a faster rate than expected since the beginning of the COVID-19 pandemic. However, despite this uptick, the currency is still on track for its worst quarter against the dollar in a year.

According to the Office for National Statistics, the UK economy in the second quarter of 2023 was 1.8% larger than in the final quarter of 2019, which was the last full quarter before the pandemic hit. This new estimate contradicts the previous one from August 11, which concluded that the economy was still 0.2% smaller than pre-pandemic levels, placing it at the bottom among major advanced economies.

The pound saw a rise of up to 0.52%, reaching a session high of $1.2265, and was last at $1.2264. However, over the quarter, the currency has experienced a 3.3% decrease in value. Earlier in the week, it hit a six-month low of $1.2211 due to the ongoing strength of the dollar, which is heading for its strongest quarterly performance in a year.

ING strategist, Francesco Pesole, commented on the recent rise of the pound, stating, “Sterling has rallied in line with the dollar correction into this morning’s market open, but there are no real UK-specific drivers that would justify a sustained sterling outperformance at this stage.”

The main reason for the dollar’s strength is the significant rise in U.S. Treasury yields, reflecting investors’ belief that U.S. interest rates will not be falling anytime soon. In contrast, 10-year UK gilt yields have only risen by 8 basis points compared to the 45 basis points increase in the U.S. 10-year note. This has made the pound less appealing to non-UK investors who can find greater returns elsewhere.

Despite the uncertainty, money markets indicate that traders have not ruled out the possibility of one final rate hike from the Bank of England this year, giving it a 33% chance of happening at the upcoming meeting in November. Just a few weeks ago, traders were expecting UK rates to peak at around 6% next year. The removal of this prospect has resulted in a more than 3% decrease in the value of the pound this month, making it the largest monthly slide since the budget crisis in September last year, which saw the currency lose almost 4%.

When compared to the euro, the pound has experienced a 0.6% decrease this quarter, but it was last up 0.1% against the single European currency at 86.51 pence.

Overall, the UK economy’s growth since the onset of the pandemic has surpassed expectations, leading to a temporary rise in the value of the pound. However, the currency is still facing challenges, particularly due to the strength of the dollar and the uncertainty surrounding interest rate hikes. Traders remain cautious, and the pound’s performance against other major currencies will continue to be closely monitored in the coming months.

More detail via Investing.com UK here… ( Image via Investing.com UK )

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