The pound enters the final hours of the third quarter with macro momentum shifting in its favour for the first time in weeks. GBP/USD fell to 1.32055 on Tuesday, its lowest level since June, before rising to 1.3270 during Wednesday’s European session following updated data from the Office for National Statistics that revealed the UK economy expanded by 0.5% in the second quarter, surpassing the first estimate of 0.4% and exceeding expectations for no revision. At 8:30 a.m., the U.S. personal consumption expenditures report revealed that core inflation stood at 3.0%, compared to a forecast of 3.3%. This adjustment led to a reduction in the likelihood of an October Federal Reserve rate hike, decreasing from 47% to 37% following the release of the data. Those two data points impacted the pair from both directions. Robust growth in the UK bolsters expectations for an interest rate increase by the Bank of England, while weaker inflation figures in the U.S. diminish the likelihood of a rate hike by the Federal Reserve. Money markets are currently reflecting an 80% to 85% likelihood of a quarter-point increase by the Bank of England on November 5, with expectations for four total hikes by mid-2027. The Fed’s October odds currently stand at less than half that level. The monthly damage remains substantial. GBP/USD has experienced a decline of 2.40% in the last month and a decrease of 1.87% over the past year. The pair traded at 1.3538 on September 8, 1.3395 on September 18, and 1.3344 on September 22, before sliding below 1.3250 following the Federal Reserve’s hike on September 16 to a 3.75%–4.00% range. The pound’s average over the past six months is 1.3428, indicating that the current level is 1.2% lower than this average.
The pound’s 2026 low is recorded at 1.3164, established on June 25. Tuesday’s low of 1.32055 approached that level by 0.3%. The thesis for this forecast is straightforward. GBP/USD declined in September as the Federal Reserve raised interest rates while the Bank of England maintained its stance, thereby expanding the policy differential in favour of the dollar. That gap is currently narrowing from both sides. A Bank of England with three members already in favour of an interest rate increase, an economy expanding at a pace surpassing any other G7 nation in the first half of the year, and a U.S. inflation report that lowered the likelihood of a Federal Reserve rate hike to below 40% creates a favourable environment for a rebound toward 1.3345 and 1.3400 in October. The UK budget on October 28 and gilt yields at 19-year highs limit the potential extent of the rally. A daily close below 1.3205 would signal a potential retest of the 1.3164 yearly low. The price action over the past two weeks illustrates the rapid impact of the Fed’s decision on the pair. Prior to the Federal Reserve’s actions, sterling exhibited robust trading performance. GBP/USD maintained a level of 1.3395 on September 18, recorded 1.33885 on September 19, and returned to 1.3395 on September 20. It declined to 1.33676 on September 21 and recorded the weekly high of 1.3344 on September 22. The Fed’s September 16 hike required time to manifest its effects, after which the selling intensified. GBP/USD experienced a decline to 1.32406 on September 23, reflecting a single-day decrease of 0.8%, and further fell to 1.32197 on September 24. It stabilised at 1.3245 on September 25, when the daily fix came in at 1.3252, then traded at 1.32505 on September 26 and 1.32335 on September 27.
Monday witnessed a short-lived rally. Sterling advanced to 1.326 as market participants anticipated a more aggressive approach from the Bank of England in response to increasing inflationary pressures. Concurrently, oil prices experienced an uptick following President Trump’s dismissal of an Iranian suggestion to reopen the Strait of Hormuz. Tuesday marked a significant decline. GBP/USD declined to 1.32055, marking the lowest level since June, reflecting the most significant 24-hour movement of the past week, with a decrease of 0.174%. Investors showed a preference for the dollar, driven by increasing expectations of a Federal Reserve interest rate hike potentially occurring as early as October, whereas the Bank of England was anticipated to remain inactive until November. Elevated oil prices and stalled negotiations regarding the reopening of the Strait of Hormuz have strengthened expectations for additional tightening by the Federal Reserve and increased safe-haven demand for the dollar. Wednesday saw a partial reversal of the previous movement. GBP/USD rebounded following a slight decline on Tuesday, trading close to 1.3270 during the European session. This movement was bolstered by the upward revision of UK second-quarter growth data released at 7:00 a.m. London time. The U.S. data released at 8:30 a.m. subsequently led to a broad depreciation of the dollar, accompanied by a decline in the 2-year Treasury yield, which fell by more than 6 basis points to 4.827%. The levels for the week are distinctly outlined. Support is established at 1.32055, which corresponds to Tuesday’s low, followed by the 1.3164 low recorded on June 25. Resistance is positioned at 1.3300, followed by 1.3344, which marks the high from September 22, and at 1.3400, the level at which the pair was trading prior to the Fed decision.
Wednesday’s revised UK growth data provided a distinct positive surprise for sterling. The Office for National Statistics reported that gross domestic product increased by 0.5% in the three months ending in June, a revision from the initial estimate of 0.4%. Economists had anticipated that the figure would remain unchanged. The quarter experienced a 0.6% expansion in the first quarter. GDP in the second quarter was recorded at 2.0% higher than its level in the fourth quarter of 2024, a revision from the previous estimate of 1.9%. The upgrade positions the UK’s first-half growth as the leading figure within the G7. The international comparison underscores the argument. In the second quarter, Canada experienced a GDP growth of 0.8%, followed by the United States and Japan at 0.4%, Germany at 0.3%, and Italy at 0.2%. France, in contrast, reported no growth. The UK’s 0.5% outperformed all G7 counterparts except Canada, while its aggregate growth of 1.1% in the first half of the year positioned it at the forefront of the group. Services were the primary factor behind the revision. Services output experienced a growth of 0.6% during the quarter, primarily driven by an increase of 2.3% in professional, scientific, and technical activities. Scientific research and development experienced a notable increase of 6.7%, while advertising and market research saw a rise of 5.4%. Additionally, legal activities progressed by 3.3%. Information and communication output experienced a growth of 2.5%, bolstered by a 3.6% rise in computer programming and consultancy. Overall services output increased by 1.7% compared to its level a year earlier.
Business investment exhibited the most significant adjustment. The ONS revised its estimate for second-quarter business investment growth to 5.2% year over year, a significant increase from the previous estimate of 0.8%, accompanied by a quarterly gain of 1.8%. The first quarter’s quarterly figure was revised to 3.0% from 1.7%. Corporate capital spending is experiencing robust expansion, which underpins productivity and fosters long-term growth. Household finances have shown signs of improvement. Real household disposable income per head increased by 1.0% in the second quarter, rebounding from a 0.8% decrease in the first quarter. Real GDP per capita increased by 0.5%, positioning it 1.2% higher than the level recorded a year prior. Nominal GDP increased by 0.8% in the quarter and by 3.8% compared to the same period last year. The data possesses inherent limitations. The second quarter concluded in June, prior to the surge in energy prices and the increase in borrowing costs observed during the summer months. The ONS has adjusted its projection for 2025 growth, lowering it to 1.2% from the previous estimate of 1.3%. Growth in the second half is confronted with the challenges posed by the energy shock and a Bank Rate of 3.75%. For GBP/USD, the revision bolsters the argument for a Bank of England rate increase.
