- UK economy posts a small contraction of -0.1% in May
- Higher rates will damage the economy going forward
- Sterling rally continues breaking above 1.30 against the dollar
The UK economy posted only a small contraction in May which was much better than forecast as the country continues to show strong resilience in the face of significant pressures.
That resilience has helped to sustain inflation at much higher levels than the Bank of England was hoping for which has in turn led to more rate hikes and market pricing in many more to come.
The economy has basically stagnated now for the last year, which is still much better than what many feared 12 months ago. We could see a little more growth going forward as lower energy and food bills free up some disposable income but with rates now very high and rising, costs for many are about to rise substantially, possibly more than offsetting any of those benefits.
Higher rates may also weigh on growth going forward if they impact household spending decisions, by encouraging more saving in anticipation of higher interest costs or encouraging them to pay down debt, etc. Time will tell to what extent that is the case as spending has been more resilient than expected until now.
A big breakout but are there more twists to come?
The pound has continued to trend higher against the dollar on the back of the data in recent days, breaking through a big psychological barrier in the process. The break of 1.30 is a very bullish move after what has already been a strong couple of months for the currency.
GBPUSD Daily
Source – OANDA on Trading View
It’s now already trading around 1.31 and only appears to be gathering momentum rather than losing it. The next area of potential resistance that stands out is 1.32, having been a very notable level in the past, with 1.3350 a similar case above that.
Of course, a lot depends on the economic data at this point but clearly, this week’s US inflation data combined with the recent UK jobs and economy readings have given the cable pair a bump. Can we continue to expect to see similar readings or are there many more twists to come?