RTRS: Pound shines as strong GDP data dents QE prospects
(Reuters) - Sterling rose to a two week high against the euro on Thursday after the UK economy grew far more than expected in the third quarter, denting expectations of further monetary easing from the Bank of England.
However, analysts warned its gains may be short-lived unless upcoming data suggests the economy can sustain a decent growth rate in the fourth quarter and beyond.
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Britain exited recession with growth of 1.0 percent during the three months to September, its strongest quarterly reading in five years and well above analysts' forecasts for a rise of around 0.6 percent.
This caused the euro to fall to 80.31 pence, its weakest since October 11. A drop below 80.23 pence would mark its lowest in three weeks.
"Given the downside surprises we have had out of Europe over the last couple of days the data clearly supports euro/sterling lower," said Elsa Lignos, senior currency strategist at RBC.
Against the dollar the pound climbed 0.6 percent to a one-week high of $1.6144, leaving it close to last week's high of $1.6178 as it recovered further from a drop below $1.60 earlier this week.
These gains helped sterling rise to a three-week high against a trade-weighted basket of currencies at 84.1.
The UK data contrasted with weak euro zone activity data on Wednesday which suggested the region's problems were deepening.
But concerns also remained about the fragility of the UK economy, which is vulnerable to trouble in the euro zone, its largest trading partner.
As a result, most analysts expected sterling to struggle to rise towards $1.63 and its 2012 peak of $1.6310.
The jump in GDP was largely the result of temporary factors, including a boost from the London Olympics.
"While the number this morning has provided a bit of the boost its effect (on sterling) has been relatively muted ... the outlook for Q4 is not looking that great," said Alex Lawson, senior broker at Moneycorp.
RBC's Lignos also said there was a risk of the GDP data being revised lower.
QE PROSPECTS
Confirmation of a solid upturn dampened expectations the BoE will opt for more monetary easing next month. A halt to the bank's quantitative easing programme, which pumps more pounds into the economy, would likely give the currency a boost.
But there is still a possibility that policymakers will opt to act next month.
Speaking earlier this week, BoE Governor Mervyn King said the central bank was ready to inject more cash into the economy if recent positive signs fade.
"While the GDP data is welcome news for the FX market, I think the rally is possibly over already and this is an attractive opportunity to sell, as the BoE is going to continue with its QE programme," said Adam Myers, senior currency strategist at Credit Agricole.
Britain's chancellor George Osborne said the GDP data showed the economy was on the mend but warned there were still challenges ahead.
Next week's purchasing managers' survey on manufacturing activity for October will be watched closely for clues to the state of the UK economy.
