Sterling climbs as UK GDP beats estimate

• UK GDP contracts in May but beats estimate
• British pound hits 15-month high against the US dollar

The British pound continues to rally against the US dollar. GBP/USD has risen to 1.3068, up 0.62%. The pound hit a 15-month high earlier today and is up a sizzling 1.77% this week.

UK GDP contracts but beats estimate

Today’s GDP release was good and bad, depending on how you view the half-full cup. Investors opted for the positive view and the British pound has responded with strong gains.

The GDP report for May contracted by 0.1%, down from a 0.2% gain in April. Not great news, but the markets chose to focus on the fact that GDP beat the consensus estimate of -0.3%, and one could argue that a 0.1% move in either direction is essentially a stall in economic growth. An additional holiday for King Charles’ coronation also weighed on the May release. The Office for National Statistics stated that if June GDP is flat or higher, then the UK economy will avoid a contraction for the second quarter as a whole. So, the UK economy may have contracted a bit, but things could always get worse, right?

The US dollar had a rough Wednesday after US inflation dropped lower than the estimate.  Headline inflation fell from 4.0% y/y to 3.0%, and more importantly, the core rate dropped to 4.8%, down from 5.3%. Both readings were lower than the forecast and point to inflation continuing to move in the right direction.

The Federal Reserve will no doubt be pleased with the numbers, but the money markets don’t think the inflation release will sway the Fed from hiking rates on July 27th.  However, the probability of a pause in September is higher and it’s entirely possible that this prolonged rate-tightening cycle could wrap up after July if inflation and employment numbers show that the US economy continues to cool down.

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GBP/USD Technical

• GBP/USD has support at 1.2972 and 1.2906
•  GBP/USD tested resistance at 1.3060 earlier in the day. Above, there is resistance at 1.3116

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