Pound Sterling Muted Despite Strong UK GDP as Dollar Strengthens on Fed Hike Bets

The British pound showed little reaction to stronger-than-expected UK economic growth data on Friday, as the U.S. dollar gained ground ahead of a key inflation report that could reinforce expectations for another Federal Reserve interest rate hike.

As of 5:10 AM ET (09:10 GMT), the GBP/USD currency pair traded at 1.3504, down 0.06% for the day, according to data from Investing.com.

UK Growth Outpaces Forecasts

The UK's Gross Domestic Product (GDP) expanded by 0.4% in July, accelerating from June's 0.3% growth and beating market expectations. In a note, analysts from ING highlighted that a significant portion of the growth was driven by the information technology sector, potentially linked to a recent wave of AI-driven investment.

Despite the positive domestic data, sterling's performance was overshadowed by broader market dynamics, particularly the strength of the U.S. dollar. The market's attention is firmly fixed on the forthcoming U.S. Consumer Price Index (CPI) data, with consensus forecasts pointing to a 0.4% monthly rise in headline inflation and a 0.2% increase in the core reading.

Dollar Strengthens on Rate Speculation

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Analysts see further room for the dollar to appreciate as investors position for a hawkish Federal Reserve. Francesco Pesole, a foreign exchange strategist at ING, noted that the dollar is rebuilding its positive correlation with long-term U.S. Treasury yields. "We continue to see upside risks for the dollar," Pesole said.

Pesole also attributed the greenback's strength to "defensive flows" spurred by a roughly 15% increase in oil prices amid geopolitical tensions and a stalled rally in the Japanese yen. He suggested that a return to the 100 level for the Dollar Index (DXY) is now "a tangible destination."

Contrasting Central Bank Outlooks

While markets are pricing in a high probability of a Fed rate hike next week, the outlook for the Bank of England appears more dovetailed. Economists at Bank of America Global Research forecast the BoE will vote 6-3 to hold its key interest rate at 3.75%, suggesting that market pricing for nearly four rate hikes next year is "too aggressive."

ING maintains a fourth-quarter forecast of 1.33 for the GBP/USD pair. The firm stated that a significant shift in its bullish dollar stance would require either a confirmed Fed rate hike in September or a soft CPI report that markedly lowers inflation expectations.