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Sterling Rallies As UK Growth Exceeds Forecasts

On Wednesday, the British Pound rose, mostly helped by a weaker US dollar, as data showed that there was unexpected growth in the UK economy in the month of May.

Economic growth

There was a 0.5% increase in economic output in May, even though there was a fall in consumer services because the rise in prices hit shoppers. Economists had predicted that there would be zero growth in the British economy in the month of May.

On Wednesday, the fortunes of the British pound were mostly linked to the movements in the US dollar. However, the day saw the currency come down to an almost two-year low at a value of $1.1828. This was after the release of the US inflation data, which ended up beating forecasts.

Traders who had made bets on a higher currency decided to take their profits and this saw the US dollar recorded a sharp decline for the day.

Sterling rises

There was a 0.6% gain in the sterling by 1456 GMT and it reached the high for the day at $1.1968. But, the British currency fell 0.3% against the euro to a value of 84.61 pence. This was mostly because the single currency had bounced back after it had symbolically declined to the value of $1.

This year has seen the British pound fall against the US dollar rather sharply, mostly because the greenback has soared. However, it is also because investors have been worried about the health of the UK’s economy and the political turmoil in the country after Boris Johnson, the prime minister tendered his resignation.

Now, the focus of the ruling Conservative Party is to choose a leader to replace Johnson as the prime minister of Britain.

Further problems

Even though the economy grew in May and results were better than expected, some of the other indicators show that economic momentum may be weakening in the country. This will make things even more difficult for the Bank of England, as it tries to take on the rising inflation by hiking up interest rates and also trying to prevent an excessive slowdown in the British economy.

Market analysts said that the recent growth data was certainly relevant for the Bank of England, considering the scale of the economic slowdown and the problems in future indicators. The Bank of England is scheduled to meet on August 4th and analysts have predicted yet another interest rate hike of 25 basis points.

Investors are also keeping their eye on the leadership race of the Conservative party, as a number of candidates have popped up. They are planning on announcing the winner on September 5th. Most of the candidates who have stepped up to replace Boris Johnson have promised to reduce taxes in order to stimulate economic growth.

Rishi Sunka, the former finance minister of Britain, has also decided to participate in the race. He stated that his primary goal would be to first control inflation before he does anything else, as it is expected to reach the double digits.

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