13 Feb 2025

The Pound Sterling experiences an upward movement during Thursday's European trading session, buoyed by favorable economic data from the United Kingdom and a positive market sentiment. The UK Office for National Statistics (ONS) has reported a year-on-year increase in Gross Domestic Product (GDP) of 1.4% for the final quarter of 2024, surpassing the anticipated 1.1% and the revised growth of 1% from the previous quarter, which was initially reported as 0.9%.

On a quarterly basis, the UK economy unexpectedly grew by 0.1%, contrasting with the flat performance observed in the July-September period, where a contraction was anticipated.

In terms of monthly performance, the UK economy demonstrated a strong growth rate of 0.4% in December, exceeding both forecasts and the previous month's figure of 0.1%.

Despite the positive GDP figures for December and the last quarter of the previous year, it is improbable that they will provide lasting support for the British currency. This is due to the Bank of England (BoE) having revised its GDP growth forecast for the year down to 0.75% during last week’s monetary policy meeting, where it also lowered borrowing rates by 25 basis points to 4.5% and emphasized a cautious stance regarding interest rate reductions.

Officials from the BoE have indicated a careful approach to any potential interest rate cuts, citing ongoing concerns about persistent inflationary pressures. BoE Chief Economist Huw Pill remarked earlier today that the central bank must proceed with caution regarding further policy easing, as the struggle against inflation remains ongoing.

The restrictions we previously implemented can be partially lifted due to the successful, albeit incomplete, disinflation process, according to Pill, as reported by Reuters. He further emphasized that the Bank of England must intensify efforts to reduce inflation, indicating that aggressive interest rate cuts are not feasible at this time.

On Wednesday, Bank of England policymaker Megan Greene also expressed support for a cautious and gradual strategy regarding interest rate reductions, citing her belief that inflation is unlikely to diminish on its own. Consequently, she asserted that monetary policy must continue to be restrictive.

In addition, UK factory data for December exceeded expectations, with month-on-month Industrial Production increasing by 0.5%, surpassing the anticipated 0.2%. Manufacturing Production rose by 0.7%, contrary to expectations of a 0.1% decline. Notably, both Industrial and Manufacturing Production had experienced declines in November.

The Pound Sterling approaches the significant psychological level of 1.2500 against the US Dollar (USD) during European trading hours on Thursday. The GBP/USD pair exhibits strength as encouraging developments in peace negotiations between Russia and Ukraine have mitigated the effects of unexpectedly high Consumer Price Index (CPI) data from the United States for January, which was released on Wednesday. This data has heightened expectations that the Federal Reserve (Fed) will maintain interest rates at their current levels for an extended period.

On Wednesday, US President Donald Trump confirmed that both Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskiy expressed a desire for peace during separate phone conversations. He has also instructed his senior officials to initiate discussions regarding a truce, as reported by Reuters. This situation has enhanced investors' risk appetite and reduced the demand for safe-haven assets, including the US Dollar. Consequently, the US Dollar Index (DXY), which measures the value of the Greenback against six major currencies, has declined to approximately 107.50.

In January, the annual headline inflation in the US rose to 3%, surpassing both estimates and the previous figure of 2.9%. The core CPI inflation, which excludes the more volatile food and energy prices, unexpectedly accelerated to 3.3%, compared to 3.2% in December. The stronger-than-anticipated inflation data has led traders to reduce their expectations for an interest rate cut by the Fed in the upcoming June meeting. According to the CME FedWatch tool, the probability of a rate cut in June has decreased to 36%, down from 50% on Tuesday.

Looking ahead, the next significant factor influencing the US Dollar will be President Trump’s decision regarding reciprocal tariffs, which he is anticipated to announce on Thursday. The White House indicated on Wednesday that Trump might reveal his reciprocal tariff strategy prior to his meeting with Indian Prime Minister Narendra Modi, as reported by CNBC. Such an announcement could potentially enhance the safe-haven appeal of the US Dollar once more.

On the economic data front, investors will be closely monitoring the upcoming US Producer Price Index (PPI) data.