Sterling-dollar exchange rates unexpectedly fell yesterday despite a second consecutive quarter of growth for the UK economy. Exchange rates briefly fell to a low of $1.5269 as markets reacted to the latest news and prompted market players to sell out of their Sterling positions. The decline did not last for long though as weak data from the States and dovish comments regarding the FED's stimulus programme pushed rates back over $1.54 this morning. For more information on live rates of exchange click here
So why did positive UK data prompt a downturn in rates?
Yesterday's UK Gross Domestic Product (GDP) figures came in exactly as forecast at 0.6%, It meant it was the second quarter running that the UK economy had grown following the 0.3% growth we witnessed in Q1 and you would think this positive news would have lent further support to the pound.
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In actual fact the figures had the opposite effect and this was down to a couple of factors. A lot of investors would have been hoping for stronger growth and when this didn't happen it led to them selling out of their positions which dropped the pounds value. Coupled with the fact the Bank of England (BoE) will look to keep their aggressive monetary policy in place to help maintain the UK recovery over the next couple of quarters, Sterling suffered a surprise fall against most of the major currencies before recovering against the dollar over the course of the afternoon and this morning..
So what next?
All attention will now turn to the BoE meeting on the 1st August and the UK inflation report on the 7th August. Although all nine MPC members voted against more quantitative easing at the start of this month it has been stated that they will look at other alternatives. It is expected that the BoE will look to start issuing 'Forward Guidance' in the next few weeks, Forward Guidance is essentially a promise not to surprise the markets and in this case the BoE will look at short term interest rates. This should help stabilise the markets in the short to medium term and if acting upon should see the pound climb against a basket of currencies.
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