Sterling Stuck Near One-Month Low After UK GDP Data

The British pound remained near a one-month low against the U.S. dollar on Friday, with little movement following data that showed the UK economy returned to growth in August.

The pound was last trading flat against the dollar at $1.3069, slightly above Thursday’s low of $1.3011, the weakest level since mid-September. It also held steady against the euro, trading at 83.70 pence per euro.

According to figures from the Office for National Statistics, Britain’s economic output rose by 0.2% in August, meeting economists’ expectations in a Reuters poll. This growth marked a rebound after two consecutive months of stagnation. While the data provided some relief for finance minister Rachel Reeves ahead of the new Labour government’s first budget later this month, it still reflected a slowdown compared to earlier in the year.

Despite the return to growth, the pound saw little reaction in the market. "The data didn’t change the big picture a great deal, it provides confirmation that the UK economy is slowing in the second half of this year, but that’s understandable. I don’t think anyone thought that the strong pace of growth in the first half of the year was sustainable," said Lee Hardman, senior FX strategist at MUFG.

Hardman noted that the upcoming inflation and labor market reports, due next week, would be more significant for the Bank of England's (BoE) decision-making ahead of their next meeting in November. "For the Bank of England, next week is much more important," Hardman added, emphasizing how these reports will influence the central bank's messaging in the run-up to their next rate decision.

Throughout much of this year, the pound has been supported by expectations that the BoE would cut rates at a slower pace compared to other central banks like the U.S. Federal Reserve and the European Central Bank. However, this sentiment has shifted recently, contributing to the pound's decline over the past month against the dollar. The market's expectations for Fed rate cuts have diminished, while BoE governor Andrew Bailey suggested last week that the central bank might adopt a "more aggressive" approach to rate cuts if inflationary pressures continue to ease.

U.S. Consumer Price Index (CPI) data and jobless claims released on Thursday did little to alter market expectations for the Federal Reserve, with markets still anticipating two 25-basis-point rate cuts at each of the Fed’s remaining meetings this year. In contrast, the market sees at least one 25-basis-point BoE rate cut across its two remaining meetings, with a 40% chance of a second cut. 

By fLEXI tEAM