The pound has managed to recover on Thursday, as the US dollar failed to retain its strength. However, analysts have warned that the pound’s gains will be limited.

The Bank of England Governor Andrew Bailey was cautious yesterday when he spoke at the ECB Forum in Portugal. He said that it was clear that the economy is slowing, and the BoE would take a more gradual approach toward hiking interest rates. Recession fears and Brexit tensions could keep the pound lower.

In terms of economic releases, on Thursday, the final UK GDP report met expectation and previous estimates as the economy expanded by 0.8% during the first quarter of 2022. The UK Office for National Statistics also reported that the current account deficit reached £51.7 billion or 8.3% of the gross domestic product in the first three months of the current year.

GDP growth

The Office for National Statistics (ONS) has confirmed that the UK economy grew by 0.8% in January-March (first quarter), as first estimated. The annual figures showed that the UK GDP rose by 8.7% in Q1, which was the same as the previous reading and as expected. The GBP/USD currency pair was up on the day, holding on its gains.

Darren Morgan, director of economic statistics at the ONS, said: “Our latest estimate for economic growth in the first quarter is unrevised as a whole, showing the UK continued to recover from the pandemic. Both household incomes and spending rose in cash terms in the first quarter, leaving the rate of saving unchanged. However, once taking account of inflation, incomes fell again, for the fourth consecutive quarter.”

According to the latest GDP data from the ONS, UK household incomes suffered another fall in the first three months of this year, as the cost-of-living crisis worsened. Inflation outperformed earnings in January-March, for the fourth quarter in a row. UK households experienced the longest drop in real income on record. Real Household Disposable Income fell by 0.2% in the January-March quarter. The latest drop in UK household real incomes leaves people less protected as the risk of recession looms ahead.

Paul Dales of Capital Economics explained that the final Q1 GDP data could leave households “a bit more vulnerable to the big fall in real incomes that’s going to hit in Q2 and Q3.” While consumer spending and GDP won’t fall as much as real incomes, the economy will remain weak and recession will pose a real risk, he said.

Inflation to persist

Inflation is expected to surge and reach higher levels than other major economies, the governor of the Bank of England has warned. Speaking at a conference of central bankers in Portugal, Andrew Bailey said inflation was higher in the UK and would persist for longer than previously expected as increasing petrol and gas prices have pushed household bills higher.

Bailey said he was determined to increase interest rates aggressively to control inflationary pressures.  He explained: “I think the UK economy is probably weakening rather earlier and somewhat more than others. There will be circumstances in which we will have to do more. We’re not there yet in terms of the next meeting. We’re still a month away, but that’s on the table. But you shouldn’t assume it’s the only thing on the table – that’s the key point.”

While economic growth has slowed down, Bailey said that there was a possibility of raising rates by 50 basis points at the Bank’s next meeting in August.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.