The Pound Sterling surged after the UK's GDP growth exceeded expectations in May, reducing the likelihood of an interest rate cut on August 1. The Pound to Euro exchange rate climbed to a one-month high, while the Pound to Dollar exchange rate reached a four-month high following the ONS report that UK GDP rose 0.4% month-on-month in May.
This increase more than doubled the consensus estimate of 0.2% growth and surpassed April's stagnant 0% reading. The growth was primarily driven by the services sector, the largest in the UK economy, which saw output increase by 0.3% in May 2024.
As a result, the UK economy grew by 0.9% in the three months to May 2024 compared to the previous three months, with services output rising by 1.1%. These figures indicate a robust ongoing economic recovery in the UK, reducing the need for the Bank of England to intervene with an interest rate cut.
May marked the fourth increase in GDP over the past five months. Ashley Webb, UK Economist at Capital Economics, notes that this trend supports the idea that the negative impacts of higher interest rates and inflation are beginning to diminish. Capital Economics now projects that GDP for the second quarter is on track for a 0.7% quarterly increase, matching the first quarter's growth.
As of 8am today, GBP/USD rallied to 1.2863, and GBP/EUR reached 1.1867.
