The pound fell slightly against the US dollar on Friday. GBP/USD is trading at 1.2928 in the European session, down 0.13% on the day.
UK economy fell 0.1% in January
The UK economy grew slightly in the second half of 2024, rising 0.1% in the third quarter, then stabilizing in the third quarter. The new year saw no improvement, with GDP contracting 0.1% m/m in January, after rising 0.4% in December, growing below market expectations of 0.1%. This sudden contraction was attributed to declines in the production and manufacturing sectors. The economy grew 0.2% in the three months to January, up from 0.1% in the three months to December, but below market expectations of 0.3%%.
A weak GDP report won’t make things easier for Finance Secretary Rachel Reeves, who will announce the Treasury Department’s “spring statement” on March 26. Reeves is expected to outline plans to raise taxes and cut spending. Tax increases on UK companies will likely weigh on investment, employment, and growth.
The Bank of England meets on March 20 and is widely expected to keep interest rates at 4.5%. The Bank of England cut interest rates by a quarter of a percentage point in February. Inflation rose sharply in January to 3.0% year-on-year, up from 2.5% in December. High inflation and weak GDP have raised concerns about stagflation, characterized by persistent inflation and weak growth.
Another problem facing Bank of England policymakers is US President Donald Trump’s tariff policy. The Office for Budget Responsibility, the UK’s independent economic and financial forecaster, issued this statement alongside its Economic Outlook and provided an assessment of the potential impact of the government’s tax and spending plans.
Sterling Falls as Trade Concerns Grow
The pound fell slightly against the U.S. dollar on Thursday, as the pair gave up some of its gains that pushed it to a four-month high on Wednesday.
At the time of writing, the GBP/USD exchange rate is trading at around $1.2950, down almost 0.2% from Thursday’s opening levels.
The U.S. dollar trended broadly higher on Thursday, as a negative shift in risk sentiment in the market helped support the safe-haven currency.
The deterioration in market sentiment is largely due to the uncertainty surrounding US trade policy and fears that trade tensions will weigh heavily on global growth this year.
The growing risk of a U.S. government shutdown, where Senate Democrats threaten to block any spending bill, is also dampening market confidence.
However, the appreciation of the US dollar exchange rate remains limited, as US dollar investors continue to digest the US Consumer Price Index released on Wednesday.
CPI figures reported inflation slowing more than expected in February, prompting the Federal Reserve to reconsider its interest rate forecast. However, the prospect of lower US interest rates has not proven as damaging to the US dollar as usual, amid hopes that accommodative monetary policy will ease pressure on the US economy.
The British pound (GBP) traded in a narrow range on Thursday, as the currency sought to consolidate Wednesday’s gains.
The pound jumped late Wednesday amid hopes that trade relations between the UK and the European Union will return in the coming months.
While the UK’s return to the EU seems unlikely, sterling investors hope that close economic ties will help boost UK growth in the coming years.
UK economy contracts 0.1% and decline casts shadow
Official figures on Friday showed that the UK economy unexpectedly contracted by 0.1% month-on-month in January.
Britain’s Office for National Statistics reported that the decline was mainly due to a contraction in the production sector. Economists polled by Reuters had expected the country’s gross domestic product to grow by 0.1%.
Shortly after the data was published, the pound fell 0.15% against the US dollar to trade at $1.293. The pound sterling stabilized against the euro.
Meanwhile, long-term government borrowing costs have soared, jumping to their highest levels in decades earlier this year. The yield on UK 20-year government bonds – known as government bonds – rose by two basis points, while the yield on 30-year Treasuries rose by 4 basis points.
Services production rose 0.1% month-on-month in January, but slowed from the 0.4% increase in December. Production output fell 0.9% month-on-month, after recording a 0.5% rise in the previous month. Meanwhile, monthly construction output fell another 0.2% in January, after also falling 0.2% in December.
Data from the Office for National Statistics last month showed that the UK economy grew 0.1% in the fourth quarter, beating expectations. It stabilized in the third quarter.
Monthly GDP data has been volatile since then, contracting 0.1% in October, 0.1% expansion in November, and 0.4% month-on-month expansion in December, thanks to services and production growth.
Friday’s GDP release will be the last data release ahead of the UK Treasury’s “spring statement” on March 26, when finance minister Rachel Reeves presents an update on her plans for the British economy. The Office for Budget Responsibility, the UK’s independent economic and financial forecaster, issued this statement along with its Economic Outlook, providing its assessment of the potential impact of the government’s tax and spending plans.
