United Kingdom (UK) May Gross Domestic Product (GDP) figures slightly exceeded expectations, with real GDP rising by 0.1% month-on-month compared to a consensus forecast of 0% and following a -0.1% decline in April. This result aligns with the Bank of England’s (BoE) baseline Q2 forecast of +0.1% quarter-on-quarter growth [1]. The modest growth was primarily driven by a 0.3% increase in services, which was largely attributed to the professional, scientific, and technical activities subsector, contributing 0.16 percentage points to real GDP growth. However, this positive performance was partially offset by contractions in production (-0.5%) and construction (-0.8%), highlighting underlying weaknesses in the broader economy [1].
Market participants have fully priced in 50 basis points of BoE tightening over the next twelve months, with the swaps curve indicating a 25 basis point rate hike to 4.00% expected in November. Despite persistent inflation, analysts at Brown Brothers Harriman (BBH) argue that further BoE rate hikes in the current environment of sluggish growth and high inflation are not bullish for the British Pound (GBP). Resistance for GBP/USD is noted at 1.3600 [1].
Political developments are also influencing market sentiment. The prospect of increased government spending and borrowing under incoming Prime Minister Andy Burnham is seen as a factor that could limit a sustained rally in GBP. Additionally, investor relief that Ed Miliband is unlikely to become the next Chancellor of the Exchequer, as he is perceived as the least market-friendly candidate, contributed to the Pound consolidating its recent gains [1].
CONCLUSION
While UK May GDP marginally beat expectations, underlying sectoral weaknesses and the prospect of further BoE rate hikes in a sluggish growth environment are limiting upside for the British Pound. Political factors, including fiscal policy expectations under the new Prime Minister, are also weighing on market sentiment. Overall, the outlook for GBP remains cautious despite the recent data surprise.