Pound tumbles after data shows British economy contracted in June

By Alun John

Aug 12 (Reuters) - Sterling slid against a firming dollar on Friday and also lost ground on the euro as data showed Britain's economy contracted in June, even if not by as much as had been feared.

The Office for National Statistics said gross domestic product fell by 0.6% in June, the biggest contraction since January 2021 but less severe than the 1.3% drop predicted by a Reuters poll of economists.

The pound GBP=D3 tumbled 0.58% against the dollar to $1.2143, in morning trade, falling more sharply than peers against the rallying greenback.

The euro EUR=EBS and Japanese yen JPY=EBS also lost ground, however, as markets digested a new round of hawkish remarks from policy makers at the U.S. Federal Reserve, helping the dollar regain some of its losses from earlier in the week.

June's GDP decline was partly a result of two bank holidays in the month to celebrate Queen Elizabeth's Platinum Jubilee.

The data also suggested growing weakness among consumer-facing sectors of the economy as Britons deal with inflation reaching a 40-year high in the wake of the war in Ukraine.

The euro climbed 0.3% on the pound EURGBP= to 84.82 pence its highest in two-and-a-half weeks.

It is up nearly 0.5% on the week, which would be its biggest weekly gain since mid June, though may struggle to climb much further.

"EUR/GBP is slightly stronger than we thought and could edge up to the 0.8485 area. But given the challenges faced on the continent, we would not chase EUR/GBP higher," analysts at ING said in a note.

Both Britain and mainland Europe are grappling with a string of problems from weak economies, surging inflation, and latterly growing fears of drought.

The Bank of England last week predicted Britain would enter a recession at the end of 2022 and not emerge until early 2024 as it raised interest rates to battle inflation, which it said was likely to exceed 13% in October.

News British households faced new water usage restrictions on Friday, with parts of England likely to formally declare a drought, also weighed on the pound, which has been reacting to such headlines this week.

Graphic: World FX rates in 2022 Link
Graphic: Trade-weighted sterling since Brexit vote Link

Reporting by Alun John
Editing by Mark Potter

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.