The UK’s GDP for Q2 increased by 0.3%, beating the expected growth of 0.1%. In the previous quarter, growth was 0.7%, and the annual GDP growth reached 1.2%, compared to the predicted 1.0%. June saw strong results across all sectors, helping boost the economy after slower activity in April and May. However, business investment dropped by 4% from Q1, a significant decline.

Bank Of England Flexibility

The better-than-expected growth figures give the Bank of England more flexibility. This makes an interest rate cut in September less likely. Before, the market thought there was a good chance of a cut, but this report allows the Bank to wait for more inflation data. For interest rate traders, this suggests that UK rates may stay higher for a bit longer. The odds of a September cut have dropped from nearly 50% to around 20%. Traders might look to sell near-term SONIA futures while still expecting cuts by the end of 2025. However, there is a significant warning in the report. The 4% drop in business investment is the steepest since the pandemic lockdowns in 2020. This shows a serious lack of confidence in the business community regarding the future economy.

Implications For The Pound Sterling

This weakness could limit any strength in the Pound Sterling. The initial rise in GBP after the headline number might be viewed as a chance to brace for future declines. In the coming weeks, the disappointing investment data will likely take the spotlight, putting pressure on the currency. The mixed data creates a challenging environment for the FTSE 100. While better growth is a positive sign, higher rates for longer and falling business investment could hurt corporate profits. We expect this to keep stock market volatility lower, favoring strategies that benefit from stable price movements. Looking at 2024, there was a period when persistent inflation prevented the Bank from cutting rates despite weak growth. That experience suggests the Bank will focus on controlling inflation until it hits its target. So, this GDP report reinforces the idea they won’t rush to lower borrowing costs. Create your live VT Markets account and start trading now.

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