UK growth surprised at 0.4% in July, lifting Sterling as Lloyds flagged pressure on the BoE and ING questioned rate-hike expectations.
The British Pound rose against the Dollar and Euro after stronger UK growth challenged expectations that the economy would stall in July.
At the time of writing, GBP/USD was trading around 1.3522, up 0.09% against the previous close, recovering part of Thursday’s 0.29% decline.
The ONS GDP release showed a 0.4% monthly expansion following June’s 0.3% increase, comfortably beating expectations for no growth.
UK Services, production and construction all expanded in July, although services continued to dominate growth over the broader three-month period.
That eases the immediate concern, highlighted in our GDP preview, that a stagnant economy would leave Sterling exposed to further selling.
The reaction remained modest, however.
Pound Sterling strengthened against the Euro and US Dollar following the release, while remaining slightly lower against the Australian Dollar over the chart’s morning window.
Lloyds sees a stronger quarter taking shape
Lloyds Bank calculates that even if output remains unchanged in August and September, third-quarter growth would reach 0.6%, well above the Bank of England’s 0.1% projection cited by the bank.
“Evidence that GDP has not been as adversely hit as expected as a consequence of the energy shock is becoming more of a theme,” Lloyds says.
The bank argues that this adds pressure on the BoE.
We believe the stronger starting point for the quarter makes it harder to dismiss the case for tightening on growth grounds alone.
Whether inflation warrants higher rates remains the more difficult question.
ING still expects rate-hike bets to unwind
ING’s Francesco Pesole is unconvinced that July’s growth changes the policy outlook.
The bank puts market expectations at 48 basis points of tightening by year-end and 110 basis points by July 2027.
“Our baseline is still that the Bank of England won’t hike at all, leaving sterling in front of a potential cliff-edge dovish repricing.”
ING retains fourth-quarter targets of 1.33 for GBP/USD and 0.87 for EUR/GBP, both implying a weaker Pound.
Its Dollar forecast sits around 1.6% below the current exchange rate.
Pesole also argues that the latest gilt sell-off reflects pressure from US Treasuries rather than a fresh deterioration in confidence in UK public finances.
That distinction matters for Sterling: higher yields can support a currency, but that support becomes vulnerable if investors have overestimated how far official interest rates will rise.
Pantheon finds gentler inflation pressure beneath the headline
Pantheon Macroeconomics offers another reason to avoid treating strong GDP as conclusive evidence for a hike.
Its analysis shows core import prices, excluding oil and erratic items, fell 0.4% in July, their third consecutive monthly decline.
“Import price inflation is consistent with around 1.5% core goods CPI inflation.”
The trade figures were less encouraging beneath the surface.
Pantheon reports that the headline deficit narrowed to £3.5bn from £5.5bn, but excluding precious metals it widened to £3.9bn from £3.6bn.
The ONS trade bulletin explains why that distinction matters: large, volatile precious-metals transactions can obscure underlying trade trends.
Pantheon points to transport and machinery as sources of underlying weakness, while cautioning that monthly trade figures are volatile and prone to revision.
Sterling’s immediate relief therefore faces a tougher test in the inflation data.
Stronger growth supports Lloyds’ argument that the BoE faces greater pressure to act; gentler price transmission supports ING’s concern that markets expect too much tightening.
For the GBP/USD exchange rate to sustain its recovery, investors will need evidence that those rate expectations can survive the next round of data.
