Home Daily Commentaries Pound slips as UK economy contracts

Pound slips as UK economy contracts

Daily Currency Update

UK GDP came in below estimates this morning, contracting in the second quarter of 2022, as the country’s cost-of-living crisis hit home. Official figures show that gross domestic product (GDP) shrank by 0.1% quarter on quarter in the second three months of the year, less than the 0.3% contraction expected by analysts. It comes after GDP expanded by 0.8% in the first quarter of the year.

The Office for National Statistics, which publishes the growth figures, said the contraction was largely driven by a fall in services output. The largest drag came from health and social work activities, reflecting a decline in Covid-19 activities. Some commentators are also factoring in the Queens Jubilee Bank Holiday into the decline, although not as severe as previous jubilees. ONS noted that there was a 0.2% fall in household consumption in the second quarter, offset by a positive contribution from net trade.

The data can keep expectations alive that the Bank of England (BoE) could hike 50bp on 15 September.

Key Movers

Softer than expected US July inflation data this week (both CPI and PPI) has revived global risk appetite on hopes that inflation could come under control quicker than expected. USD has been weakened on the back of this. Other data is still rising steeply though, namely Food which was 13.3% up. Fed rhetoric has been consistent all week – Inflation is the concern, so more rate hikes are expected. The latest US consumer sentiment readings, out today, will feed into this story.

Still quiet on the data front for the Eurozone. Something to keep an eye on as we enjoy more warm weather, the Rhine river is drying up, which is a key transport route through Europe. Freight through the river contributes $80bn to the European economy and as it dries up this could cause another supply chain headache.

Expected Ranges

  • GBP/USD: 1.2080 - 1.2240 ▼
  • GBP/EUR: 1.1735 - 1.1860 ▼
  • GBP/AUD: 1.7000 - 1.7200 ▼
  • EUR/USD: 1.0240 - 1.0365 ▼