Sterling Holds Firm Despite UK Growth Stalling
Written by
Daily Currency Update
Sterling remained resilient, holding above 1.3550 against the dollar, largely supported by broad-based USD weakness rather than domestic fundamentals. UK economic data released today painted a sluggish picture, reinforcing concerns over stagflation. July GDP came in flat at 0% month-on-month, missing expectations of a 0.2% rise, while industrial production fell by 0.5% (vs -0.3% expected), and manufacturing output declined by 0.3% (vs +0.2% expected). These figures highlight ongoing challenges in the UK’s manufacturing sector and suggest that growth momentum is fading.Despite the disappointing data, sterling has remained stable, benefiting from a softer dollar driven by dovish Fed expectations. Sticky inflation in the UK, expected to peak at 4% in September, adds complexity to the outlook, as the Bank of England is likely to maintain its cautious stance. The combination of weak growth and persistent inflation underscores stagflation risks, which typically weigh on the currency. However, in the current environment, relative yield advantage and global central bank divergence are offering near-term support to GBP/USD.
Looking ahead, market focus will shift to next week’s BoE rate decision and Chancellor Rachel Reeves’ autumn budget, both of which could influence sterling’s trajectory. For now, dollar dynamics remain the dominant driver.
Key Movers
The dollar extended its decline as markets absorbed a mixed U.S. inflation report and a sharp rise in jobless claims, reinforcing expectations for a Federal Reserve rate cut at next week’s FOMC meeting. August CPI rose to 2.9% year-on-year, in line with forecasts, driven by higher energy prices. Core CPI remained steady at 3.1%, suggesting underlying inflation pressures are contained. However, jobless claims surged to 267,000, well above the 235,000 expected and the highest since late 2021. This signals a notable deterioration in labour market conditions in the U.S.Markets now price in a 97% probability of a 25 basis point cut next Wednesday, with only a slim chance of a larger 50 bps move. Fed funds futures also suggest a second cut in December, though the outlook beyond year-end remains uncertain. Fitch, the ratings agency, expects two cuts this year in September and December, while Bank of America warns that tariffs and energy costs could keep inflation sticky, limiting the Fed’s room to ease further. On the political front, the Trump administration’s attempt to block Fed Governor Lisa Cook amid mortgage fraud allegations has raised concerns about central bank independence, though immediate market impact is limited.
Meanwhile, the euro outperformed, with EUR/USD rising to 1.1733 (+0.34%) as the ECB held rates steady at 2.0%. President Lagarde struck a cautious tone, stating the “disinflationary process is over” but reaffirming a data-dependent approach. German CPI was confirmed at 2.2% YoY, reinforcing price stability. The ECB is expected to remain on hold through year-end, supporting the euro amid broad USD softness.
Next week sees focus on the FOMC meeting on September 17th, with markets widely expect a 25 basis point cut. UK CPI lands on September 18th, with inflation expected to peak soon, this release will shape expectations around how much policy flexibility the Bank of England retains. 20th September sees Eurozone PMI's, which will offer fresh insight into whether eurozone growth is stabilizing or slipping further, influencing ECB policy expectations and Euro sentiment.
Expected Ranges
- GBP/USD: 1.3480 - 1.375 ▼
- GBP/EUR: 1.1490 - 1.1600 ▼
- GBP/AUD: 2.0280 - 2.0520 ▼
- EUR/USD: 1.1680 - 1.1765 ▲