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Friday, 26 January 2018

Sterling builds on rally after GDP stronger-than-expected


LONDON (Reuters) - The pound rose on Friday after Britain’s economy unexpectedly picked up speed in the last three months of 2017, adding to the view that the hit from the Brexit vote was not as bad as expected.

Gross domestic product grew by 0.5 percent in the three months to end of December, faster than analyst expectations of 0.4 percent, official data showed.

That was the fastest pace of quarterly growth last year, although the Office for National Statistics said the big picture remained one of slower and more uneven expansion in Britain.

Sterling, already up about 0.7 percent before the data, rose further for a one percent rise on the day at $1.4289 before giving up some of those gains. Against the euro, the pound also strengthened and was up 0.4 percent at 87.325 pence per euro at 0950 GMT.

“This is further confirmation that the economy has outperformed expectations since the vote,” London-based MUFG strategist Lee Hardman said.

The pound has enjoyed a strong rally this year and is up 5.5 percent against the U.S. currency, helped by a broad-based dollar sell-off that intensified this week until U.S. President Donald Trump on Thursday said he ultimately wanted a strong greenback.

Some of the world’s biggest investors have bought into the notion that sterling can move higher on the back of hopes Britain will secure itself more favourable terms when leaving the European Union and a better-than-expected domestic economic performance.

MUFG has had a bullish view on the pound for some time, with a year-end target of $1.47 and about 85 pence per euro.

With the recent run-up, Hardman said there was some risk of a pull-back, particularly as negotiations with the EU for a trade deal restart. “But the bigger picture is still supportive for sterling,” he said.

Credit Agricole analysts said that the rise of sterling should take the sting out of Britain’s above-target inflation, limiting the ability of increased rate hike expectations to boost the pound further.

“With GBP long positioning close to multi-year extremes, we advise against chasing the currency higher,” they wrote.

The internationally-focused FTSE 100 initially fell slightly after the GDP data release before recovering. British government bond futures briefly pared gains and approached a session low, before returning to their previous level, up 12 ticks on the day at 122.96 at 0933 GMT.

Reporting by Tommy Wilkes

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