Pound Traded Flat as UK GDP Beats Expectations

The British pound traded relatively flat on Friday, despite stronger-than-expected UK GDP data. The UK economy grew by 0.4% in July, beating expectations after a 0.3% gain in June.

According to ING's FX strategist Francesco Pesole, the resilience of sterling is not driven primarily by UK fundamentals. He notes that gilts have sold off again, with yields nearing 5.5% and close to 6%, but attributes this move to a higher beta to US Treasuries rather than domestic fiscal stress.

The dollar, on the other hand, continues to gain strength ahead of next week's FOMC meeting. Markets have priced in an 18 basis point rate hike, with consensus at 0.4% headline and 0.2% core month-on-month inflation. Pesole believes that a soft CPI print might weigh on the dollar but likely wouldn't push September hike odds below 50%.

BofA expects the Bank of England to hold rates at 3.75% next week in a 6-3 vote, with Pill, Greene, and Mann dissenting for a hike. They argue that market pricing of nearly four hikes by next year is excessive.