Sterling Steady After UK GDP Beats Forecasts; Dollar Firms on Fed Rate Hike Bets

The British pound held steady on Friday, showing little reaction to stronger-than-expected UK economic growth data, as the U.S. dollar firmed ahead of a key inflation report widely expected to cement the case for another Federal Reserve interest rate hike.

UK Economy Shows Resilience

The pound was largely unchanged against the dollar, with the GBP/USD pair trading around 1.3504, according to market data. The muted response came even as official figures showed the UK's Gross Domestic Product (GDP) grew by 0.4% in July, surpassing forecasts after a 0.3% gain in June.

Analysts at ING noted that about half of the month's growth came from the IT sector, suggesting a potential boost from investment related to artificial intelligence. However, the positive domestic data was overshadowed by broader market dynamics centered on U.S. monetary policy.

Dollar Gains as Fed Decision Looms

The primary driver in currency markets was the anticipation of the U.S. August Consumer Price Index (CPI) report. Investors are positioning for the data, which consensus forecasts expect to show a 0.4% headline monthly increase and a 0.2% rise in the core figure, to reinforce the Federal Reserve's resolve to raise rates at its upcoming meeting.

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• Markets have priced in 18 basis points of tightening for next week’s Federal Open Market Committee (FOMC) meeting.
• According to Francesco Pesole, an FX strategist at ING, a soft CPI print might weigh on the dollar but would be unlikely to push the odds of a September hike below 50%.

Outlook for Sterling and Central Banks

Analysts suggest sterling's recent performance is more closely tied to global factors than domestic fundamentals. A recent sell-off in UK government bonds, or gilts, which has pushed 10-year yields toward 5.5%, is seen by ING as reflecting a higher correlation to U.S. Treasuries rather than specific UK fiscal stress.

Looking ahead, Bank of America (BofA) projects the Bank of England will hold its key interest rate at 3.75% next week in a 6-3 split decision. BofA also argued that market pricing for nearly four more hikes by next year is "excessive." ING maintains a bearish outlook on the pound against a strengthening dollar, targeting a GBP/USD rate of 1.33 in the fourth quarter.