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Pound Sterling Steady as UK GDP Beats Expectations; Dollar Gains on Fed Hike Bets
Summary
The British pound was little changed despite a surprise uptick in UK economic growth, as currency markets focused on upcoming U.S. inflation data expected to cement the case for another Federal Reserve rate increase.
The British pound held steady on Friday, failing to gain significant traction from stronger-than-expected UK economic growth data. Investor focus has shifted squarely to upcoming U.S. inflation figures, which are widely expected to reinforce the case for a Federal Reserve interest rate hike next week.
As of 05:10 ET (09:10 GMT), the GBP/USD pair traded down 0.06% at 1.3504, while the EUR/USD was 0.09% lower at 1.1599, reflecting broad-based dollar strength.
Dollar Firms Ahead of Key Inflation Data
The U.S. dollar is finding renewed support as markets position for the August Consumer Price Index (CPI) report. The consensus forecast is for a 0.4% month-on-month increase in the headline figure and a 0.2% rise in the core reading, according to Investing.com data.
Analysts at ING note that the dollar is rebuilding a positive correlation with long-end U.S. Treasury yields. "We continue to see upside potential for the dollar," said Francesco Pesole, an FX strategist at ING, who cited factors including a recent oil price rally and stalled yen strength as feeding a "defensive rotation back into the dollar."
Market pricing currently implies 18 basis points of tightening for the Federal Reserve's meeting next week. While Fed officials have offered mixed signals, ING suggests that even a soft CPI print would be unlikely to push the odds of a September rate hike below 50%.
AdUK GDP Beat Fails to Lift Pound
Sterling's muted reaction came even as data showed the UK economy grew by 0.4% in July, surpassing expectations after a 0.3% gain in June. ING analysts pointed out that roughly half of the increase came from the IT sector, which may be benefiting from investment related to artificial intelligence.
The pound's resilience is not being primarily driven by domestic fundamentals, according to ING. This view is supported by a sell-off in UK government bonds (gilts), with 10-year yields approaching 5.5%. The move is seen as reflecting a higher sensitivity to U.S. Treasuries rather than specific concerns about UK fiscal policy.
Looking ahead to the Bank of England's next decision, BofA analysts expect policymakers to hold rates at 3.75% in a 6-3 vote. The bank also argued that market pricing of nearly four additional hikes by next year is "excessive."
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