Key Takeaways
- The Pound Sterling (GBP) has fallen 0.2% to near 1.3420 against the US Dollar (USD) following the release of the UK’s monthly Gross Domestic Product (GDP) data for November.
- The UK economy grew 0.3% in November, faster than estimates of 0.1%, and UK factory data also came in stronger than projected.
- The strong UK GDP figure is expected to impact the Bank of England’s (BoE) dovish expectations negatively, with a potential shift towards a more neutral monetary policy stance.
- The US Dollar has strengthened on expectations that the Federal Reserve (Fed) will hold interest rates steady in the next meeting, with the US Dollar Index (DXY) trading 0.15% higher to near the monthly high of 99.26.
Introduction to the Current Market Trends
The Pound Sterling (GBP) has traded lower against its major currency peers, falling 0.2% to near 1.3420 against the US Dollar (USD) on Thursday. This decline follows the release of the United Kingdom’s (UK) monthly Gross Domestic Product (GDP) data for November, which showed a stronger-than-expected growth rate of 0.3%. The data release has significant implications for the Bank of England’s (BoE) monetary policy stance, with potential consequences for the UK economy and the Pound Sterling.
UK GDP Data and Its Implications
The Office for National Statistics (ONS) reported that the UK economy is back in the black, with GDP growth exceeding estimates. The strong GDP figure is expected to impact the BoE’s dovish expectations negatively, potentially leading to a shift towards a more neutral monetary policy stance. BoE policymaker Alan Taylor stated that he expects "monetary policy to normalise at neutral sooner rather than later," and "at-target inflation from mid-2026 is likely to be sustainable." The UK factory data also came in stronger than projected, with month-on-month (MoM) Manufacturing Production growing at a robust pace of 2.1% and Industrial Production rising 1.1%.
US Dollar Strength and Fed Expectations
The US Dollar has strengthened on expectations that the Federal Reserve (Fed) will hold interest rates steady in the next meeting. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.15% higher to near the monthly high of 99.26. According to the CME FedWatch tool, the Fed is certain to leave interest rates unchanged in the range of 3.50%-3.75% at the January policy meeting, indicating a pause in the monetary-easing campaign. The speculation that the Fed will leave interest rates steady is backed by expectations that the impact of the latest cuts is yet to be seen in the economy, as well as the US Consumer Price Index (CPI) data for December showing steady price pressures.
Technical Analysis of GBP/USD
The GBP/USD pair trades lower to near 1.3420, with the 20-day Exponential Moving Average (EMA) at 1.3438 having flattened after a steady ascent. The 14-day Relative Strength Index (RSI) at 49.23 is neutral, indicating balanced momentum. The 61.8% Fibonacci retracement at 1.3494 caps the rebound, while the 78.6% Fibonacci retracement at 1.3625 looms overhead. A topside breach could extend the recovery toward the September 2025 high of 1.3726, whereas rejection would keep range-bound trade around the 20-day EMA.
Understanding GDP and Its Impact on Currencies
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period. A higher GDP result is generally positive for a nation’s currency, as it reflects a growing economy that is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. When an economy grows, people tend to spend more, which leads to inflation, and the country’s central bank may raise interest rates to combat inflation, attracting more capital inflows and helping the local currency appreciate. Conversely, a lower GDP result is usually negative for the currency. Additionally, a higher GDP growth rate is usually a bearish factor for Gold prices, as higher interest rates increase the opportunity cost of holding Gold versus placing money in a cash deposit account.