The Pound Sterling rises by 0.45% to approximately 1.3440 against major currencies after the UK’s Q3 GDP data is released. The economy grew by 0.1% quarter-on-quarter, aligning with initial estimates, and by 1.3% on an annual basis.
The British currency experiences temporary impact from the GDP figures, with concerns remaining about future performance. The Bank of England predicts zero growth in Q4 GDP, after reducing the interest rate to 3.75% by a narrow vote.
Strength Against The US Dollar
The Pound is the strongest against the US Dollar among major currencies, with the US Dollar Index declining by 0.25% to near 98.50. The GBP/USD pair climbs amid cautious expectations for US GDP data, estimated to show a growth of 3.2% annually.
As the Fed maintains scepticism about rate cuts, pressure on the US currency persists. The US Consumer Price Index indicates a moderate price rise, and Cleveland Fed President advises against rate alterations until spring.
The technical analysis indicates an upward trend for the GBP/USD duo, trading at 1.3415, with strong momentum confirmed by the Relative Strength Index at 62.89. The potential for further gains exists if the pair surpasses the resistance of 1.3471.
We are seeing Pound Sterling get a temporary lift from the latest UK GDP figures, pushing GBP/USD towards 1.3440. However, this strength is likely to be short-lived as the data simply confirmed what we already knew and doesn’t change the bigger picture. The market’s attention is already moving on from this backward-looking number.
Bank Of England’s Path
The real story for the Pound is the Bank of England’s path, and it is pointing downwards. Last week’s rate cut to 3.75%, combined with the forecast for zero growth in the fourth quarter, paints a gloomy picture for the UK economy. This reminds us of the period after the 2016 Brexit vote, where similar economic uncertainty led the BoE to cut rates, which weighed on Sterling for months.
On the other side of the Atlantic, the US Federal Reserve appears more hesitant to ease its policy, creating a clear divergence. All eyes will now be on tomorrow’s US GDP data, which is expected to slow to a 3.2% annual pace from 3.8%. A weaker-than-expected number could increase the chances of a Fed rate cut, which currently stand at only 22.5% for January according to the CME FedWatch tool, and briefly weaken the dollar.
This conflicting outlook between a weak UK and a potentially slowing US is a recipe for volatility. We have seen the 1-month implied volatility for GBP/USD options rise to 8.9% in anticipation of these central bank policy shifts. This suggests that using options, such as buying puts on the Pound, could be a prudent way to position for a drop while managing risk.
For now, the technicals show immediate support for GBP/USD around the 20-day average at 1.3329, with resistance near the October high of 1.3471. With a light UK economic calendar for the rest of this holiday week, the pair’s direction will be almost entirely driven by the upcoming US data and any resulting shifts in Fed expectations. We should be prepared for sharp moves if the US GDP number surprises the market.
