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Is the UK economy strengthening and giving Sterling a

Recent data from the UK has been much better than expected. GDP came in at 0.6% for the second quarter of 2013 versus expectations of 0.3%. The much better than expected PMI (Purchasing Manager’s Index) data out in the UK a couple of days ago certainly demonstrates that the economy is starting to perform well.

The headline PMI services activity beat consensus expectations coming in at 60.2, the highest reading since 2006. The composite PMI implies the fastest pace of expansion since the data began in 1998. We have had all three PMIs for the month (manufacturing, construction and services) come in at multi-year highs.

The picture for the UK economy through Q3 is looking encouraging and certainly the strength in Sterling against the US dollar in the last few weeks has been very impressive with the pound appreciating from $1.48 to more than $1.55 today.

Will this continue?

Sterling’s rally has been very impressive over the last few weeks against the greenback but at current levels Sterling is looking rather toppy against the US dollar. Falling mortgage rates and rising consumer confidence is driving a consumer led recovery. UK GDP growth figures have been upgraded to 1.3% in 2013 from 1.1% and to 2.4% from 1.8% in 2014 due to the recent better than expected economic data. However, the UK is not growing as fast as the US yet Sterling has strengthened considerably against the US dollar.

There is still a long way to go for the UK economy but with interest rates set to remain at 0.5% for the next three years, mortgage repayments will remain historically low and this will mean that consumers will have more personal disposable income which should boost retail sales and give a further fillip to the economy although inflation risks could become a concern. British firms will need to build on their competitiveness by investing and improving efficiency and productivity.

With regards to comparing the US economy and the UK, the U.S. economy is also performing well and trade figures announced on Tuesday showed that the world’s largest economy had the smallest trade deficit in almost four years. Growth figure in the U.S. have also been upgraded with a forecast of 2.5% now from 2.0%. However, last week’s non-farm payroll figures came in below expectations in the U.S. but generally recent economic data has been better than expected and this has been demonstrated by the strength in share prices on Wall Street.

Ronnie Chopra

Ronnie Chopra

Ronnie has over 15 years’ experience working with financial products and started his financial career at CMC Markets in 1999 and in 2001 he joined Merrill Lynch Investment Managers (now BlackRock - the world's largest asset manager) and worked there for over four years as a RFP analyst. Since 2005, he has worked in a number of brokerage firms as a CFD and FX sales trader and market strategist. A seasoned commentator, Ronnie has appeared many times on global business channels (BBC, Bloomberg, CNBC, CNN and SKY) to discuss topics concerning the financial markets. He has written numerous business-related articles and regularly lectures.