FX Focus: Pound surges to seven-month high against the dollar despite poor GDP data

The pound hit a seven-month high against the dollar on Friday (28 April), as investors shrugged off a report showing the UK economy grew at the slowest pace in a year in the first three months of 2017.

Sterling, which has been largely on the front foot since Prime Minister Theresa May announced a surprise snap election 10 days ago, climbed above $1.2945 for the first time since 3 October earlier in the session and by early afternoon was 0.16% higher against the dollar, trading at $1.2922.

"UK GDP data came in under forecasts but failed to keep the pound down for long," said Caxton FX's analyst Alexandra Russell-Oliver.

"Sterling-dollar could strengthen further [and] holding gains above this level could open the door to slightly higher levels for the rate."

Data released by the Office for National Statistics, showed the UK economy grew by 0.3% for the first quarter of 2017; the slowest growth rate since the first three months of 2016. The report noted that the slower pace of economic growth was primarily due to the service sector, which also grew by 0.3% versus 0.8% over the fourth quarter of 2016.

Ian Stewart, chief economist at Deloitte said the long-awaited slowdown is finally coming but the wider market should be wary of over-interpreting the figures.

"Quarterly GDP growth is choppy and prone to revision. Inflation will continue to squeeze the consumer but the outlook for manufacturing and exports has brightened," he explained. "Growth is slowing, but this looks like a cooling, not collapse, in UK activity."

The pound, however, slid 0.19% against the euro to €1.1843, as the common currency gained ground after inflation in the eurozone rose 1.9% year-on-year in April, higher than the 1.5% reading recorded in March and above expectations for a 1.8% increase.

The figure was close to the European Central Bank's 2% target and came a day after ECB President Mario Draghi warned that the path back to the central banks inflation target will be gradual.

"The fact that eurozone inflation in April was still slightly below February's peak level maintains our belief that a rate of 2.0% will not be re-visited for some considerable time to come," said Howard Archer, chief UK and European economist at IHS Markit.

"Inflation will highly likely dip again in May as April's Easter related price hikes are unwound.We see eurozone inflation ending 2017 around 1.5% and it may well hover around 1.5-1.7% during 2018."

Elsewhere, the dollar struggled for direction against its main rivals, after data showed the US economy expanded at its slowest pace since 2014.

The greenback gained 0.32% against the yen, trading at ¥111.62, but fell 0.22% against the Swiss franc to CHF0.9919. The US currency, however, was broadly flat against its Australian and Canadian counterparts.

The world's largest economy grew 0.7% in the first three months of the year, a sharp slowdown from last year's 2.1% and below forecast for a 1% reading.

"The probability of Federal Reserve rate hike is a major focus among investors after the US GDP data which was underwhelming," said Naeem Aslam, chief economist at Think Markets UK.

"The Fed is not going to be hawkish when they see that the consumers are not digging deep into their pockets."