UK economy grows after rebound in April ; Further rate hike expected by ECB
There were no negative surprises for the Pound this morning as the UK economy has returned to growth (0.3% contraction recorded in March ) after data this morning showed that UK GDP increased by 0.2% in April, matching City forecasts. This means that UK GDP is now estimated to be 0.3% above its pre-coronavirus levels (set in February 2020) the ONS reports.
The Office for National Statistic said the services sector was the main contributor to growth this April, expanding by 0.3%. Output in consumer-facing services grew by 1.0% in April 2023, following a fall of 0.8% in March 2023 but the production sector shrank by 0.3% in April while construction output shrank by 0.6%.
The dip in construction output can be attributed to housebuilders cutting back on construction of new homes, with potential buyers being spooked by the prospect of further rate hikes, in turn increasing mortgage rates over the coming months.
Taking a deeper dive into the manufacturing data; 8 of the 13 sub-sectors shrank in April with the Pharmaceutical sector output dropping by 5% and manufacturing of electrical goods dropping by 3.8%.
In other news, both Barclays and CIBC have suggested the Pound could remain supported against the Euro if the Bank of England stick to their plan to “out-hike” the European Central Bank. Analysts at Barclays are suggesting that we could see GBPEUR break 1.17 again in the near term with market-implied expectations hinting that investors are prepared for the Bank of England to raise Bank Rate to as high as 5.75% this year, a level that would be significantly higher than where the ECB is likely to end its rate hiking cycle.
Any volatility in GBPEUR however will depend on the nature of Thursday's European Central Bank (ECB) interest rate decision and guidance where a further 25 basis points of hikes are expected to be delivered.
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