UK growth gives sterling a firmer base
Market overview
FX markets are ending the week with a broadly constructive tone, with sterling among the better-supported major currencies after resilient UK growth data reinforced confidence in the domestic outlook. Second-quarter GDP met expectations at 0.4%, while a stronger-than-forecast June reading suggested the economy retained more momentum than many had anticipated. Beyond the UK, global equities remain firm, volatility is subdued and investors continue to favour higher-yielding currencies. The revival of the AI trade has helped lift risk appetite, while US rates are signalling softer near-term Fed expectations without pointing to a material slowdown in growth. For FX, the combination of resilient activity, firm long-end yields and supportive risk sentiment continues to favour carry, leaving sterling well placed heading into the end of the week.
GBP: Strong growth keeps sterling supported
Sterling retains a firm underlying bias after UK second-quarter GDP expanded by 0.4%, following 0.6% growth in the opening quarter. The stronger signal came from June, where output rose 0.3% month on month against expectations for no growth, while annual expansion reached 1.2%.
The figures reinforce the view that the UK economy is carrying more momentum than previously feared and should help maintain support for the pound. Recent labour data have also suggested that the deterioration in employment conditions is stabilising, potentially keeping wage pressures elevated and preserving expectations of tighter Bank of England policy later this year.
The immediate market response was restrained, with GBP/EUR moving towards 1.1710 and GBP/USD around 1.3497. That muted reaction suggests much of sterling's yield advantage is already reflected in pricing.
Political risk remains the more significant medium-term question. Markets have so far taken the change in Prime Minister to Andy Burnham largely in their stride, while yesterday's Clacton by-election generated little reaction despite Nigel Farage's victory over Count Binface. Attention is likely to shift increasingly towards fiscal policy as the Autumn Budget approaches.
GBP/EUR continues to look well supported above 1.16, with consolidation between 1.16 and 1.17 likely to remain the dominant near-term theme. The greater test for sterling may come once Parliament returns in September and scrutiny of government spending intensifies.
USD: Dollar finds support beyond the Fed
The dollar is heading towards its first weekly gain in three despite softer US payrolls and inflation data reducing expectations for near-term Federal Reserve tightening.
The key distinction is coming from the Treasury curve. Short-term yields have fallen as investors judge that policymakers have greater scope to wait, but the 10-year yield remains higher on the week. That points to continued confidence in US growth rather than a material deterioration in the economic outlook.
Two benign inflation readings and softer employment data have pushed the implied probability of a September Fed hike towards 35%, but the dollar has remained resilient. Firm longer-dated yields, healthy risk appetite and renewed energy concerns are offsetting the loss of some short-end rate support.
Oil has gained around 5% this week following Washington's new measures targeting Iranian oil revenues, alongside fresh Houthi attacks on Saudi energy infrastructure. Those developments keep inflation and geopolitical risk firmly on the radar.
US retail sales will be today's main domestic release. With the dollar already absorbing softer inflation data comfortably, a sizeable surprise may be required to generate a more decisive move.
EUR: Carry demand caps the upside
EUR/USD remains confined to a tight range, underlining the lack of conviction that continues to define summer trading.
The macroeconomic backdrop has improved. Eurozone growth has proved more resilient than anticipated and inflation remains sufficiently firm to keep expectations of additional ECB tightening alive. Even so, the euro has struggled to translate that support into sustained gains.
The problem is increasingly one of valuation and relative appeal. Markets are already close to pricing a full 25bp ECB increase next month, limiting the potential for further positive repricing. At the same time, low volatility is encouraging investors back into carry trades, favouring higher-yielding currencies over the euro.
EUR/USD therefore remains heavily influenced by developments on the US side, where the dollar has shown little inclination to weaken despite softer inflation figures.
From a technical perspective, resistance near 1.16 continues to contain the upside, while 1.15 remains the key area of support. Revised second-quarter Eurozone GDP is unlikely to materially change that picture, with little deviation expected from the previously reported 0.4% quarterly expansion.
Looking ahead
US retail sales: The main US release today, with a significant surprise likely needed to shift the dollar materially.
Eurozone GDP: Revised Q2 figures are expected to confirm growth of around 0.4% quarter on quarter.
Energy markets: Oil prices and Middle East developments remain important for inflation expectations and commodity-linked currencies.
UK fiscal risk: Sterling's attention is likely to turn increasingly towards September's return of Parliament and the late-October Autumn Budget.
Volatility and carry: Continued calm across markets should remain supportive of higher-yielding currencies, although any renewed risk aversion could quickly challenge that positioning.