GBP surged against the EUR, USD, and other currencies following a robust rebound in UK economic growth during the first quarter. With UK GDP climbing 0.6% quarter-on-quarter, surpassing expectations of 0.4%, GBP/EUR exchange rate reached 1.1630, as reported by the ONS.
Although the UK experienced negative growth in the final two quarters of 2023, indicating a recession, today's data indicates that the recession was brief and mild. Year-on-year growth for Q1 stood at 0.2%, exceeding the expected flat growth of 0%.
Based on money market indicators, the recent unexpected data shifts have slightly reduced the likelihood of a June rate cut from 45% to 40%. This adjustment has contributed to the GBP's rebound. Currently, GBP/USD exchange rate has climbed beyond 1.25, reaching 1.2540 at present. This uptick suggests that market sentiment may be inclined towards stabilising against the recent weakness prompted by the Bank of England's actions.
A significant portion of the growth stemmed from increased consumer spending, which rose by 0.2% quarter-on-quarter, indicating the ongoing impact of declining inflation. Additionally, there was a notable increase in total business investment, marking a 1.4% quarter-on-quarter gain. This type of growth is favourable as it can enhance productivity within the economy.
The drag on GDP growth from net trade, which was particularly pronounced in Q4, was alleviated by a significant decrease in imports, contributing 0.4 percentage points to GDP growth. Despite the positive response of GBP to these data, we anticipate limited upside potential leading up to the release of next week's labour market data and the subsequent week's inflation figures.
