GBP/USD Rebounds on GDP, but US CPI Could Decide the Next Move

GBP/USD bounced after stronger UK GDP and output figures, with manufacturing and services showing resilience despite continued weakness in construction. While a September BoE hike remains unlikely, markets are pricing a more hawkish path further out as energy-driven inflation risks build. Attention now turns to US inflation, with the pound’s rebound facing resistance after Thursday’s sharp selloff.

 

GBP/USD Rises as UK Growth Firms and BoE Hike Bets Build

July’s UK data dump provided a welcome upside surprise, with activity strengthening across manufacturing and services while construction remained the obvious weak spot. Monthly GDP rose 0.4%, while manufacturing output increased 0.9%.

The figures are unlikely to bring forward an imminent BoE hike, particularly with employment conditions still weak. But they do add to evidence that parts of the economy remain resilient as inflation risks build, while markets are already pricing a more hawkish policy path further out.

GBP/USD enjoyed a modest bounce following the data, although whether that can survive the broader rise in the US dollar and yesterday’s selloff remains another matter.

Source: Office for National Statistics (ONS)

UK Growth and Output Beat Expectations

• Monthly GDP: 0.4% m/m, 1.6% y/y
• Manufacturing: 0.9% m/m, 2.6% y/y
• Services: 0.4% m/m, 2.1% y/y
• Industrial production: 0.2% m/m, 0.6% y/y
• Construction: 0.1% m/m, but -2.5% y/y

BoE Faces a Growth-Inflation Dilemma

While the BoE is set to meet on 17 September, an imminent hike still seems unlikely. Employment and output remain weak, and policymakers are probably hoping the crude oil rally loses momentum before higher energy costs become embedded in inflation expectations and domestic prices.

However, the BoE is increasingly caught between a weakening economy and renewed inflation risks. Global bond prices have fallen sharply and yields have surged, although this is not purely a UK story. Higher gilt yields are already tightening financial conditions, which could reduce the need for the BoE to act immediately. But the inflationary forces driving those yields higher are precisely what policymakers cannot ignore.

We also know from previous energy shocks that central banks are prepared to tolerate weaker growth and employment if higher energy costs threaten to become embedded in inflation expectations and domestic prices. The logic is that the short-term economic pain from tighter policy is preferable to allowing another inflation cycle to become entrenched. At least, that is the bet.
 

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Markets Price a More Hawkish BoE Path

Markets increasingly think the BoE will eventually have to act. While short-dated SONIA pricing still points to a September hold, the one-year OIS has risen much faster than the three-month rate, widening the spread between them.

LSEG (UK gilt yields, SONIA OIS), Bank of England

That suggests traders are increasingly pricing tighter policy later this year and into 2027, rather than an immediate September hike. Furthermore, it increasingly hawkish market pricing also contrasts with economists, most of whom still expect rates to remain unchanged through the rest of the year.

The hurdle for a hike therefore remains whether higher energy costs begin feeding into broader domestic inflation. A temporary oil shock can largely be looked through, particularly with growth and employment already weak. But if wages, services inflation or inflation expectations begin turning higher, the BoE would have a much stronger case to tighten despite the softer economy.

 

GBP/USD Technical Analysis: British Pound vs US Dollar

The pound is recovering from yesterday’s post-US PPI lows, but I suspect this could be a gift for GBP/USD bears unless US inflation data surprises to the downside later today. A doji and shooting star formed on the daily chart, with both failing to close above the July high. Bearish momentum then slammed GBP/USD lower on Thursday.

The bias is for a break beneath the 50-day EMA and a move towards the high-volume node (HVN) at 1.3451. The 1.34 handle and 200-day EMA around 1.3420 may also provide a decent support zone for bears to target if the wheels really fall off.

While momentum is pointing higher on the 1-hour timeframe, it has stalled around the monthly VWAP. The monthly pivot point and weekly VPOC are also clustered just below 1.3550, providing another potential resistance area for bears. A break above this week’s high would invalidate my near-term bearish bias.

Source: ICE, TradingView