Pound Sterling hits one-month high as UK GDP data beats estimates

The Pound Sterling gains against its peers as the UK GDP grew more than expected in June and in the overall Q2.
The UK's factory sector returned to expansion after contracting significantly in May.
US Treasury Secretary Bessent said he supports a larger interest-rate reduction by the Fed in September.

The Pound Sterling (GBP) attracts bids against its major peers on Thursday on upbeat United Kingdom (UK) Gross Domestic Product (GDP) and factory data. The Office for National Statistics (ONS) reported that the economy grew by 0.3% in the second quarter of the year, stronger than expectations of 0.1%. In the first quarter of the year, GDP growth was 0.7%.

In June, the UK economy grew by 0.4% after contracting 0.1% in May, while it was expected to rise just by 0.1%.

Factory data has also come in stronger than projected. Month-on-month, Manufacturing and Industrial Production rose by 0.5% and 0.7% in June, respectively, after declining significantly in May.

Upbeat GDP and factory data show that the economy is holding up better than anticipated, a scenario that could allow the Bank of England (BoE) to avoid reducing interest rates aggressively and thus supportive for the Pound Sterling.

In the monetary policy meeting earlier this month, the BoE reduced interest rates by 25 basis points (bps) to 4.00% and retained its “gradual and careful” monetary expansion guidance. Still, it was a very tight decision as four of the nine BoE members voted to keep rates unchanged.

Daily digest market movers: Pound Sterling refreshes monthly high against US Dollar

The Pound Sterling jumps to near 1.3600 against the US Dollar (USD) during the European trading session on Thursday after the release of the UK GDP data.
The US Dollar faces selling pressure as traders have become increasingly confident that the Federal Reserve (Fed) will reduce interest rates in the monetary policy meeting in September. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades vulnerably near the two-week low around 97.60.
According to the CME FedWatch tool, traders have almost fully priced in a 25 basis points (bps) interest rate reduction in September that would push borrowing rates lower to 4.00-4.25%.
Fed interest rate cut expectations have intensified due to cooling labor market conditions and evidence of little impact from tariffs on inflation in the latest Consumer Price Index (CPI) report.
The US Nonfarm Payrolls (NFP) report showed earlier this month that new jobs created in July were lower than projected, and data for May and June were revised significantly lower. Meanwhile, the CPI report showed on Tuesday that the headline inflation grew at a moderate pace of 0.2% on a month, as expected, slower than the prior reading of 0.3%. The CPI report didn’t show any significant signs that the impact of tariffs is feeding into prices.
On Wednesday, US Treasury Secretary Scott Bessent said, in an interview with Bloomberg TV, that the Fed should follow an aggressive monetary easing, citing labor market concerns. Bessent projected a “series of interest rate cuts” from the Fed and stated that the central bank could deliver a larger, 50-basis-points reduction in the September meeting. “Rates are too constrictive. We should probably be 150 to 175 basis points lower," Bessent said.
In Thursday’s session, investors will focus on the US Producer Price Index (PPI) data for July, which will be published at 12:30 GMT. Month-on-month, headline and core PPI are estimated to have risen by 0.2%, after remaining flat in June. On year, the headline and the core PPI are expected to have grown at a faster pace of 2.5% and 2.9%, respectively.

Technical Analysis: Pound Sterling rises to near 1.3600

The Pound Sterling advances to near 1.3600 against the US Dollar on Thursday, the highest level seen in a month. The near-term trend of the GBP/USD pair remains bullish as it holds the 20-day Exponential Moving Average (EMA), which trades around 1.3445.

The 14-day Relative Strength Index (RSI) breaks above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.

Looking down, the August 11 low of 1.3400 will act as a key support zone. On the upside, the July 1 high near 1.3790 will act as a key barrier.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.