Pound Rallies as Markets Latch Onto Signs of Economic Improvement

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The British pound is rising as traders take the positives out of a dreary quarterly GDP report.

The ONS said the economy grew just 0.1% in Q3, which was in line with estimates but down on the second quarter’s 0.2% growth, which was itself downgraded from the initial 0.3% estimate.

On December 12, it was reported the economy shrank 0.1% in October alone.

“The UK economy is grinding to a halt and showing little sign of achieving what it did in the first half of the year,” says Lindsay James, investment strategist at Quilter.

The latest data highlights a significant loss of momentum: the economy grew 0.7% in the first quarter, largely due to government spending.

Despite the headlines, the pound has shown resilience, defending gains made in the wake of last Thursday’s Bank of England decision.

Sterling’s resilience could also be due to some constructive takeaways in today’s ONS numbers. Sandra Horsfield, economist at Investec, notes a “substantial” revision to business investment, which is now reported to have risen by 1.5% in Q3, almost fully reversing its Q2 drop.

“All in all, notwithstanding the reportedly weak picture for household incomes, we would characterise the numbers as painting a (mildly) stronger picture for UK economy than before,” says Horsfield.

An upswing in activity was hinted at by the PMI survey for December, which was released last week, and confirmed a notable increase in activity now that the budget is out of the way.

“There are signs that momentum picked up in the UK economy in December, after a stronger than expected UK PMI report and some positive signs from the high street that retail sales may have bounced back after posting a surprise decline for November. The PMI survey for December noted that businesses and consumers seemed a little more confident once the budget was out of the way,” says Kathlenn Brooks, research director at XTB.

📈 For the pound, a year-end improvement in activity is supportive of the uptrends we are seeing in the unfurling recoveries in GBP/EUR and GBP/USD.

“If momentum in Q4 was less weak than appeared to be the case initially, that adds another reason for the Bank of England to hold fire rather than follow up with another rate cut at the next scheduled opportunity in February,” says Horsfield.

Above: GBP/EUR at daily intervals.

GBP/EUR Year-End 2025

Built from leading bank forecasts.

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It has carved out some short-term ‘mini’ uptrends against both the euro and dollar, which should hold into early 2026, particularly now that news and data should dry up over the Christmas period:

The pound to euro exchange rate has risen to 1.1433, having been as low as 1.1285 in mid-November.

The pound to dollar exchange rate rises to 1.34 once more, having been as low as 1.3311 last week and 1.3010 in mid-November.

Above: GBP/USD at daily intervals.

The pound’s November lows against both the euro and dollar confirm that the currency underwent a significant downward adjustment ahead of the November 26 budget.

The subsequent recovery confirms post-event relief. Also, last Thursday’s Bank of England interest rate cut was well anticipated beforehand, while the Bank’s guidance didn’t indicate any clear commitment to further rate reductions.

Further gains against the dollar are possible on account of broader USD weakness linked to expectations for interest rate reductions at the Federal Reserve in 2026.

However, strength against the euro might prove relatively short-lived on account of the UK’s slowing economy: remember, the pound-euro best reflects investor perceptions on the UK economy.

“Going forward, November’s Budget measures will do nothing for growth after the OBR forecasted zero impact from the policies introduced at the despatch box,” says James.

“The pound has long been supported by a hawkish BoE, which we expect to slowly fade over the course of 2026 and translate into a somewhat weaker outlook,” says UBS in a just-published year-ahead FX market assessment.