Pound Sterling Rises on Surprise UK Growth as Dollar Falters

The British pound advanced against the U.S. dollar on Thursday, buoyed by stronger-than-expected UK economic growth data. A simultaneous pullback in the dollar, driven by what analysts described as concerns over debt pressures in the artificial intelligence sector, provided an additional tailwind for sterling.

As of 5:00 AM ET, the pound was up 0.51% against the dollar at $1.3259, while the euro also gained, rising 0.56% to $1.1216.

UK Economy Shows Unexpected Resilience

Data from the UK's Office for National Statistics (ONS) on Thursday showed the economy's surprising strength, defying forecasts for a contraction.

• Monthly GDP: Grew 0.1% in August, compared to analyst expectations of a 0.1% decline.
• Annual GDP: The yearly growth rate hit 2.1%, its strongest pace since October 2022.
• Manufacturing Output: Jumped 1.2% during the month.

Paul Dales, chief UK economist at Capital Economics, noted the data "continues the extraordinary resilience of the economy to the pressures from high energy prices and borrowing costs." Samuel Fuller, director at Financial Markets Online, said the figures give the Bank of England "ample room to focus on bringing down inflation," adding that markets now "widely expect" the central bank to raise its benchmark rate to 4% within three weeks.

Dollar Reverses on AI Debt Jitters

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The U.S. dollar index saw a sharp reversal after hitting a recent high on Wednesday following hotter-than-expected September inflation data. Analysts at ING attributed the turnaround to mounting market anxiety over debt in the high-flying AI sector.

Chris Turner, Global Head of Markets at ING, pointed to a sell-off in bonds issued by AI infrastructure firm CoreWeave, whose 2032 bonds have reportedly fallen to 78 cents on the dollar. "Instead of the dollar strengthening as a safe haven, it has weakened on a re-pricing of a more dovish Fed," Turner said. This suggests investors are betting that financial stress could prompt the Federal Reserve to ease its monetary policy stance.

Market Outlook

Investors are now looking ahead to upcoming U.S. retail sales and producer price index (PPI) data for further direction. According to Turner, strong figures could reignite speculation about the Federal Reserve's tightening cycle and would be "modestly dollar-positive."

ING analysts suggested the dollar's rally may be "largely complete in the short-term" after a more than 4% gain in the past month, with selling interest likely to emerge if the dollar index (DXY) returns to the 102.40-102.50 range. If AI debt concerns persist, Turner noted that the EUR/USD could rally toward the 1.1300-1.1350 area on dollar weakness alone.