The British pound continued its upward trajectory against the US dollar, reaching a 15-month high above $1.31, buoyed by official data revealing a smaller-than-expected contraction in the UK economy for the month of May.
Despite the inclusion of an additional bank holiday in May to commemorate the King's coronation, GDP only declined by 0.1% compared to economists' predictions of a sharper 0.4% fall. This unexpected resilience in economic performance was viewed positively by money markets, paving the way for potential interest rate increases.
The Office for National Statistics' release also highlighted that the UK's economic output in the three months leading up to May remained flat compared to the previous quarter, slightly better than the forecasted 0.1% contraction. The additional bank holiday impacted manufacturing and construction sectors negatively but had a positive effect on entertainment, recreation, accommodation, and hospitality. After experiencing a decline due to widespread doctor strikes in April, the health sector saw a rebound of 1.1% in output.
However, Samuel Tombs from Pantheon Macroeconomics noted that May's GDP figures indicate that the economy remains lackluster, and the anticipated recovery mentioned in business surveys has not yet materialized.
While the data has provided some relief, HSBC analysts advised caution, stating that significant improvement in the domestic situation is necessary before chasing further substantial gains in the currency.