Zero UK GDP growth sends pound sterling to one-week low

Pound sterling up against euro as BoE officials say rates need to stay restrictive

On Friday, the British pound remained close to a one-week low against the dollar, poised for a weekly decline of 1.2%. This followed the release of data indicating that the UK's economy did not register any growth in the third quarter, albeit slightly exceeding expectations.

As of the latest update, the pound to dollar rate showed minimal change on the day, trading at $1.2231 and maintaining a relatively steady position compared to levels before the GDP data was disclosed.

The reported figures revealed a 0% change in gross domestic product for the July-September period, in contrast to a forecasted 0.1% decrease in a Reuters poll of economists, which many analysts said would likely signal the beginning of a recession.

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Bank of England: Premature talk of rate cuts contributes to sterling decline

In a morning note cited by Reuters on Friday, MUFG analysts said the market was likely to consolidate following the release of UK inflation data next week:

"The scale of outperformance is unlikely to prompt much change in market pricing (for the interest rate outlook). The market likely to consolidate into next week when we have the key CPI data."

Currently, markets are factoring in approximately 40 basis points of rate cuts by the Bank of England (BoE) by September next year — a figure lower than that for the U.S. Federal Reserve or the European Central Bank.

BoE Chief Economist Huw Pill drew attention on Monday by remarking that the pricing, indicating a first rate cut to Bank Rate in August 2024, “doesn't seem totally unreasonable, at least to me.” These comments, unusual as most central bank policymakers are avoiding discussions about rate cuts, contributed to the pound's 1.2% decline against the dollar this week.

Pill emphasized on Thursday that it is crucial for interest rates to remain elevated to curb inflation.

GBP forecast: Scotiabank says “soft tone” may extend for pound vs. dollar

In his GBP forecast on Friday, Shaun Osborne, Chief Currency Strategist at Scotiabank, wrote that the “soft tone” for the pound to dollar pair may extend further:

“Steady losses through the course of the week have pushed cable back to near last Friday’s low, just under 1.22. Short-term trends look soft and losses over the week suggest the soft tone may extend. The 1.22 point may be a short-term pivot, with weakness below here pointing to the risk of losses extending to retest the 1.20/1.21 area.

EUR/GBP’s high close on the week should solidify the break out from the recent trading range and target additional gains in the weeks ahead towards 0.89.”

The surge in the greenback has played a significant role in the movements of the sterling to dollar pair, widely known as “cable” in forex markets. The dollar gained on Thursday after U.S. Federal Reserve officials, including Fed Chair Jerome Powell, expressed uncertainty about whether interest rates are sufficiently high.

The British currency has also depreciated against the euro, which saw a 0.7% gain on the pound this week, marking its most substantial weekly increase since mid-September. The EURUSD exchange rate stood at 87.32 pence at the time of writing, showing little change against the pound on Friday.