Story
Pound Sterling Gains on Upbeat UK GDP as Dollar Rally Stalls
Summary
The British pound strengthened after official data showed the UK economy grew faster than expected in the second quarter, while the U.S. dollar's recent rally paused ahead of key inflation and jobs data.
The British pound appreciated against the U.S. dollar on Wednesday, buoyed by stronger-than-expected domestic economic growth data and a temporary halt in the dollar's recent broad-based rally. The GBP/USD pair rose 0.31% to trade at $1.3271 as of 05:20 ET (09:20 GMT), outperforming the euro's more modest gains.
UK Economy Shows Resilience
Data released by the Office for National Statistics provided a key catalyst for sterling's move. The report showed the UK economy expanded by 0.5% in the second quarter, surpassing consensus forecasts of a 0.4% increase. The growth was reportedly led by the services and exports sectors.
However, the same release indicated that government borrowing had increased to 5.2% of GDP, up from a previous 4.2%. Despite this, the headline growth figure provided immediate support for the pound in early trading.
Dollar Pauses Ahead of Key Data
The pound's advance was also facilitated by a pause in the U.S. dollar's recent surge, which has been driven by rising long-term bond yields. Investors are now looking ahead to crucial U.S. economic indicators, including August PCE inflation figures and ADP payrolls data, for fresh signals on the Federal Reserve's monetary policy path.
AdRecent soft U.S. data, including a drop in consumer confidence and a decline in August job openings, had slightly tempered expectations for a near-term Fed rate hike. Still, analysts caution that the dollar's underlying strength remains. "The slump in long-dated bonds will keep heavily affecting FX. For now, it argues against any material dollar correction," said ING FX strategist Francesco Pesole, adding it "may be premature to call the top in this dollar move."
Market Outlook
Upcoming U.S. economic data will be critical for currency markets. According to ING, a strong jobs report combined with a core PCE reading of 0.4% "could lift the October hike pricing again close to 20bp." Such an outcome would likely reignite the dollar's rally and put pressure on other major currencies.
In a related market, the euro also edged higher to $1.1354, but ING noted that its recent drop below summer lows was "entirely dollar-driven." The bank warned that if U.S. data comes in hot and prompts a Fed hike, the EUR/USD pair could face a "bearish leap" with risks extending toward the $1.10 level.
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