Pound Steady as UK GDP Beats; Dollar Firms on US Inflation Bets

The pound traded relatively unchanged on Friday, despite stronger-than-expected UK GDP data. The sterling's resilience is not primarily driven by UK fundamentals, with gilts selling off again and yields nearing 5.5%.

According to Francesco Pesole, FX strategist at ING, the dollar is rebuilding a positive correlation with long-end Treasury yields. This has led him to conclude that 'we continue to see upside potential for the dollar.'

The dollar's strength is also being fueled by oil's roughly 15% rally since Gulf tensions flared and stalled yen strength. Pesole notes that a soft CPI print might weigh on the dollar, but likely wouldn't push September hike odds below 50%. The markets have priced in 18 basis points for next week's FOMC meeting ahead of Friday's August CPI.

The Bank of England is expected to hold rates at 3.75% next week in a 6-3 vote, with Pill, Greene and Mann dissenting for a hike. This view comes from BofA, which argues that market pricing of nearly four hikes by next year is excessive.