How investors could benefit from UK economic growth

This week has seen the arrival of good news for the British economy, with the Confederation of British Industry (CBI) revealing that the UK's economic growth remained stable in the first quarter of the year.

Indeed, in the three months to March it actually grew 0.1 percentage point on the previous quarter, with total expansion named as 0.7 per cent for the first quarter of 2015.

For foreign exchange (forex) investors, this means taking note of a bolstering of the pound; however, this strengthening may be short-lived owing to the potential for uncertainty to be created around the upcoming election.

 

Positive outlook for UK economic growth

So, what did the CBI have to say about the exact state of the UK's economy? On April 7th, the business lobby group not only stated that growth remained stable in the first quarter, but also projected a positive outlook for the coming months.

"The outlook for 2015 looks encouraging. Our surveys show it's been a solid start to the year with the prospect of stronger growth to come. The benefits of lower oil prices should be increasingly felt, with cheaper petrol boosting households' incomes and spending power, and cutting costs for many businesses," commented Katja Hall, the CBI's deputy director general.

Growth is particularly expected to flourish in business and consumer services, and the manufacturing sector. The balance of expectations among the 746 firms included in the monthly survey is +25 per cent, which is a strong increase on the +18 per cent actually recorded for March, demonstrating that firms currently have a positive outlook.

Ms Hall also highlighted several potential barriers to the country's economic growth, which predominantly stem from issues in the Eurozone. Chief among these is continued uncertainty over Greece's bailout package, and the strength of the UK's pound stifling export market growth.

 

What do these economic changes mean for investors?

These economic developments present a number of interesting implications for forex investors. Particularly pertinent is the strengthening of the pound – something that investors will already have experience dealing with this year, thanks to unexpectedly high gains against the euro in February.

However, more recently the pound began to lose these surprising gains, making for an unpredictable forex market for investors. This most recent news of economic growth and stability has bolstered the pound once more – a development which the export industry will not welcome.

Indeed, the strengthening of the pound has made life difficult for this particular sector, and should this trend continue it is possible that the Bank of England will weigh in to curb the effect and make sure that an overvalued currency does not scare away potential trade partners. As such, forex investors need to keep a close eye on developments here to anticipate potential shifts in the forex market.

However, while the CBI's outlook for the UK's economy looks positive, the strength of the pound may not be so certain. The upcoming election has caused commentators to posit that the currency could weaken in the coming weeks as a result of uncertainty around the impending election. Therefore, this may affect the pound's gains against the euro in the near future.

So, it seems set to be an interesting few months for forex investors, who are likely to find changes in the pound particularly governed by international election perceptions, both in the run up and following the vote.

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