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The pound was higher against the US dollar on Thursday, amid US dollar weakness and better-than-expected UK GDP.
The latest UK GDP figures have beat expectations and lent support to the pound. According to the ONS, the economy expanded by 1.3% during the final quarter of 2021 compared to the 1% estimated previously. UK Current Account deficit also fell to £7.3 billion in Q4 2021 compared to the revised reading of £28.9 billion in the previous quarter.
However, disappointing news have stopped further gains for the pound to US dollar exchange rate. The latest news about the war in Ukraine have shattered hopes for a diplomatic solution while the prospect of new Western sanctions against Russia, could also weigh on the pound and support the safe-haven US dollar.
In addition to this, due to the Bank of England’s softer and more cautious tone in regard to more interest rate hikes, the pound could fail to rise further against the US dollar.
According to a Kremlin spokesperson, there has been no breakthrough to the ongoing negotiations, while an adviser to Ukraine’s President said that Russia was moving forces from Kyiv to try and encircle troops and launch attacks in the eastern part of the country.
Market participants will closely watch any fresh developments surrounding the Russia-Ukraine conflict which will provide some momentum to the GBP/USD pair.
Britain’s economy grew faster than previously expected in the last three months of 2021 when the Omicron wave hit the economy. UK’s GDP rose by 1.3% in the fourth quarter from the previous three months, according to the Office for National Statistics.
The ONS said the rise was driven by human health and social work activities, including increased GP visits at the start of the quarter, coronavirus testing and tracing activities, and the extension of the vaccination programme. On the other hand, consumer spending growth was revised lower from 1.2% to 0.5%.
Paul Dales, senior UK economist at Capital Economics, said that the upward revision to GDP growth in the fourth quarter in 2021 was due to inventories, so is not as positive as it appears, while consumer spending was revised down. The squeeze on real incomes is already being felt, but the fall in the saving rate is providing support.
The data shows that the economy is only just 0.1% smaller than the Q4 2019 pre-pandemic level. The 9.4% fall in GDP in 2020 was revised to a smaller 9.3% fall, while the 7.5% rise in GDP in 2021 was revised down to a 7.4% rise. GDP growth will probably be around 4.0% this year, Dales said.
Financial analysts and strategists have commented on the Bank of England’s more dovish and cautious tone following concerns about economic growth due to the growing cost-of-living squeeze in the UK. The Bank of England has raised interest rates three times now and markets expect another one at their next meeting in May. Policymakers at the bank have become more cautious, especially after the war in Ukraine, with the prospect of a 50bp move having faded entirely due to a weaker growth outlook. Some analysts believe that there aren’t many more hikes to come, maybe maximum two more, despite market expectations for another five rate rises this year.