The British Pound has strengthened to near a two-month high against the US Dollar, trading at $1.352 after hitting $1.3550 yesterday, with GBP/USD higher by nearly 1% this week. According to Deutsche Bank's chief UK economist Sanjay Raja, UK GDP surprised to the upside by expanding 0.1% on the month, with the three-month run rate sitting at a very strong 0.8%. The pound's performance reflects investor confidence in the UK's economic trajectory, with UK GDP bucking expectations and the economy likely to continue at or near the top of the G7 league table for GDP growth in Q2. The currency showed resilience despite mixed economic indicators, with markets focusing on the 0.1% GDP growth for May as expected by economists.
Market sentiment has improved following reports that Home Secretary Shabana Mahmood will be appointed Chancellor by incoming Prime Minister Andy Burnham when he becomes Britain's prime minister next week, rather than the more left-leaning energy minister, Ed Miliband. As per Saxo's Neil Wilson, the advantage of this approach is "selling the 'big spending vibes' to the voting public whilst simultaneously selling the 'small spending commitments' to the market." Andy Burnham is expected to be formally sworn in as prime minister on July 20. However, the Office for Budget Responsibility warned last week that Britain will need extra tax rises or spending cuts to prevent government debt spiralling higher from current levels. Market analysts note that the risk in this approach is repeating the mistakes of the Starmer regime – big promises that are undeliverable, leading to disappointment and a loss of power, credibility and confidence. UK government gilt yields are edging lower on the news, reflecting improved market confidence in the fiscal approach.
Britain's economy returned to growth in May after contracting in April, with GDP rising 0.1% month-on-month, beating expectations for no growth following April's 0.1% decline. According to Deutsche Bank's Raja, the services sector, which accounts for around 80% of the UK economy, expanded 0.3%, while construction output fell 0.8% and industrial production declined 0.5%, suggesting the recovery remains uneven. This was only partially offset by another weak period for power generation, while architectural and engineering firms also contracted. The monthly GDP reading compares economic activity in the reference month to the previous month, with a rise generally being bullish for the Pound Sterling. The GDP data serves as the main measure of UK economic activity, with the MoM reading being a key indicator for currency movements.
British government bond yields have shown mixed reactions to the leadership transition, with gilt yields up around 2-3 basis points across the curve as Andy Burnham becomes the country's seventh prime minister in the last decade. As reported by The Economic Times, the 10-year gilt yield was last at 4.9824%, up 3 bps on the day, representing a slightly bigger rise than seen in equivalent French, German or US debt. Investors are pricing in one or possibly two quarter-point interest rate hikes by the Bank of England this year, reflecting improved market confidence in the new government's fiscal approach. The bond market response suggests that while there are concerns about fiscal sustainability, the market views the leadership change as a positive development for economic stability.
