FX Focus: Pound falls against euro and dollar despite positive GDP data

The pound lost ground against both the euro and the dollar on Wednesday (27 July), failing to build on a positive report that showed the UK economy grew more than expected last month.

Official figures released by the Office for National Statistics showed second-quarter gross domestic product (GDP) rose by 0.6%, up from 0.4% in the first three months of the year and compared with expectations of growth holding steady at 0.4%.

While the figures represent a somewhat unexpected positive performance ahead of the European Union referendum, analysts warned that the data only included seven days worth of post-Brexit vote sentiment.

"The fact that much of the strength was concentrated to April implies that rising Brexit-related uncertainties may have restrained activity later in the quarter as the vote neared," said Chris Saint, senior analyst at Hargreaves Lansdown currency service.

The pound fell 0.22% against the dollar and 0.28% against the euro, exchanging hands at $1.3102 and €1.1912 respectively. However, sterling was marginally higher against the Australian dollars after weak inflation figures overnight suggested the Reserve Bank of Australia could opt to cut interest rates as soon as next week.

Elsewhere, the dollar rallied 0.91% against the yen to ¥105.61, clawing back some of the losses recorded in the previous session when the Japanese currency recorded its biggest gain against the dollar since Britain voted to leave the EU.

That came as reported suggested the Bank of Japan (BoJ) will announce a fiscal stimulus package of "more than ¥28trn" with ¥13trn in new fiscal measures at its meeting on Friday.

Central bank meetings crucial for the future

The greenback, however, fell slightly against the euro ahead of the latest rates decision by Federal Reserve, which is scheduled for 7pm BST on Wednesday night. The Fed is widely expected to leave interest rates unchanged, which would all but end any hope of the two rate hikes in 2016 that it had previously hinted at.

"While Brexit may not impact the US in the same way that it will the UK and eurozone, the Fed will likely want evidence of this before pursuing higher rates and being forced to backtrack in the event of an adverse effect on the economy," said Oanda's senior market analyst Craig Erlam.

Kit Juckes, global head of FX strategy at Societe Generale, explained the outcome of the central bank meetings in the US and Japan could have extensive repercussions on both the dollar and the yen.

"There's more than enough uncertainty around about what policy measures will actually be taken but if we get a meaningful fiscal package, more BoJ bond-buying, and any kind of upbeat FOMC message, I think USD/JPY can get back to ¥110 over the summer," he said.