Sterling at five-week high

The British pound strengthened to $1.588 on Wednesday, its highest level in around five weeks, after stronger-than-expected UK GDP data boosted sentiment and reduced the likelihood of further near-term Bank of England rate cuts.

The economy expanded 0.3% in the second quarter, triple the 0.1% growth forecast, while annual growth reached 1.2%. June GDP also surprised on the upside, rising 0.4%, suggesting that activity was gaining momentum heading into the third quarter despite higher borrowing costs and recent tax increases.

The robust economic performance comes just a week after the BoE delivered a narrow 25-basis-point rate cut in a 5–4 vote, reflecting policymakers’ divided views on how much more easing is needed.

The latest figures strengthen the case for the central bank to pause and reassess the impact of earlier cuts, especially with inflation still above target and the labor market showing resilience.

Recent labor data painted a more optimistic picture, with payrolls falling by only 8,000 in July — far better than the 20,000 drop expected — and prior months’ losses revised lower. The unemployment rate held steady at 4.7%, while private-sector wage growth slowed slightly to 4.8%, remaining well above the BoE’s 2% inflation target and signaling ongoing domestic price pressures.

Externally, sterling also benefited from a softer U.S. dollar after July’s U.S. inflation report bolstered expectations for a September Federal Reserve rate cut. Headline CPI in the U.S. rose 2.7%, below forecasts, fueling speculation that the Fed will deliver at least one 25-basis-point reduction before year-end. This policy divergence — with the BoE potentially pausing while the Fed moves toward easing — could provide further near-term support for GBP/USD.

Looking ahead, traders will focus on next week’s UK retail sales and CPI releases for further clues on the BoE’s policy path, while keeping an eye on U.S. economic data and global risk sentiment, both of which could influence sterling’s trajectory.