British Pound holds gains as UK GDP and Industrial Production beat expectations

• GBP/USD returns to the 1.3240 area from YTD lows at 1.3137 but remains within previous ranges.
• UK GDP grew against expectations in August amid strong industrial activity data.
• BoE's Pill sent the GBP tumbling on Wednesday, casting doubt about the scope of the bank's tightening cycle.

The British Pound (GBP) holds gains against the US Dollar (USD) on Wednesday’s early London session, although the market reaction to the better-than-expected UK Gross Domestic Product (GDP) and Industrial Production figures has been modest. The GBP/USD pair remains steady at 1.3240 at the time of writing after bouncing from 1.3137 lows on Wednesday but still within the last few days' trading range.

UK data released on Thursday revealed that the economy grew unexpectedly in August, with GDP showing 0.1% growth, against the 0.1% contraction anticipated by market analysts but still well below the 0.4% expansion seen in the previous month.

UK Industrial Production leads August's GDP growth

Factory activity contributed positively to the GDP growth, and offset the weak performance of the construction and services sectors. Industrial Production rose 0.8% in August following an upwardly revised 0.3% growth in July. Likewise, Manufacturing production increased 1.2%, with July's data revised up to 1% growth from the 0.9% previously estimated. Markets had forecast 0.1% monthly contractions in both cases.

On Wednesday, the Pound had dropped to fresh year-to-date (YTD) lows after the Bank of England’s (BoE) Chief Economist Huw Pill affirmed that the interest rate hike suggested by BoE policymakers in recent weeks does not need to be the start of a series. Pill warned about market speculation of four rate hikes over the next year as, in his opinion, the central bank is not “on a staircase, like we saw in 2022 and 2023”.

Elsewhere, US Consumer Price Index figures beat expectations in September and revived expectations of another Federal Reserve (Fed) interest rate hike at the October 28-29 meeting. Fed policymakers, namely the bank’s Vice Chairman of Supervision, Michele Bowman, dampened those hopes later on, suggesting that the bank might need some more time to assess the impact of September’s rate hike before tightening its monetary policy again.

Looking ahead, Strategists at UOB Group observe that, despite recent highs, the US Dollar’s upward momentum is beginning to slow.  “While it is too early to call a significant peak, the recent (USD) price action suggests that the rally that started last month may be giving way to a period of consolidation or modest easing.”