The British pound rose to a new weekly high against the US dollar on Thursday, reacting positively to the release of recent UK economic data. Most components of the report came out in the "green zone." The GBP/USD pair is currently testing the 1.25 level. Additionally, market sentiment is favoring buyers, reflecting an increased appetite for risky assets. As a result, the safe-haven US dollar is under pressure, allowing the pound to reach this local high.
According to the latest report, the UK GDP grew by 0.4% month-over-month in December—the strongest result since May last year—while most analysts had expected a modest increase of 0.1%. On a quarterly basis, GDP also entered the green zone, rising 0.1% in December, contrary to the forecasted 0.2% decline.
Additionally, data showed that the UK economy grew 0.1% quarter-over-quarter in Q4, defying expectations of a 0.1% contraction. On an annual basis, GDP expanded by 1.4%, exceeding the consensus forecast of 1.1% growth. Notably, the indicator has now been increasing for four consecutive quarters, meaning the UK economy, albeit slowly, expanded throughout 2024. The fourth quarter recorded the strongest GDP growth since Q3 2022.
Other macroeconomic indicators also landed in the green. Industrial production rose by 0.5% m/m in December, rebounding from an identical 0.5% decline in November, while analysts had expected only a 0.2% increase. Manufacturing output increased by 0.7% m/m, marking its first return to positive territory since August last year. For comparison, in September, this indicator stood at -1.0%. Construction output also increased by 1.5% y/y in December.
Another important point to note is that in December, the service activity index showed growth. In quarterly terms, this indicator reached 0.2% after experiencing two months of stagnation at the zero level. Monthly, the Index of Services rose to 0.4%, marking the highest value for this indicator since March 2024. It is worth mentioning that inflation in the service sector is a significant concern for the Bank of England, so the growth in business activity in this area has provided additional support for the British currency.
British reports indicate that the risk of stagflation has decreased. This suggests that the BoE may be able to ease its monetary policy more gradually, allowing for longer pauses between rounds of interest rate cuts.
Overall, Thursday's release is certainly favorable for the British currency. Additionally, GBP/USD has been supported by a broader risk-on sentiment in global markets.
Despite the pound's gains, traders completely ignored several fundamental factors favoring the US dollar. For example, Wednesday's CPI report showed a fourth consecutive month of rising US inflation. The headline CPI accelerated to 3.0% y/y in January, while the core CPI increased to 3.3% y/y, both exceeding forecasts.
On Thursday, another key inflation indicator, the Producer Price Index (PPI), also reflected accelerating inflation in the US. Headline PPI surged to 3.5%—the highest growth rate since March 2023—marking its fourth consecutive monthly increase. Although core PPI slightly declined to 3.6% (from 3.7%), it still remains near multi-month highs.
Additionally, traders have brushed aside Federal Reserve Chair Jerome Powell's recent remarks. Speaking before the US Senate on Wednesday and again before the House of Representatives on Thursday, Powell reaffirmed that the Fed is in no hurry to ease monetary policy. Importantly, these comments were made after the release of strong CPI and PPI data. Powell acknowledged that the Fed remains far from achieving its inflation target, implying that restrictive policy will be maintained indefinitely.
Following the release of inflation reports and Powell's speeches in Congress, market confidence has increased regarding the Fed's decision to maintain interest rates at its upcoming meetings in March and May. Additionally, the likelihood of adopting a wait-and-see approach at the June meeting has risen to 65%.
Given this contradictory fundamental background, any trading decisions for the GBP/USD pair appear risky. The market has not fully accounted for recent American events, making it difficult to anticipate a consistent price increase at this time. Therefore, it is advisable to stay out of the market.
