GBP gains ground as USD traders take profit

GBPUSD edged higher on Friday, reaching the 1.2680s, as traders reduce their short exposure before the weekend.

The British pound-dollar currency pair claws its way up from intraday oversold levels reached on Thursday when it registered near 2.0% losses on the week. This came after the US Dollar outperformed due to positive US economic data, the residual effect of Trumponomics, and upbeat comments from the Federal Reserve Chairman Jerome Powell.

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By rights, the pair should still be falling after the release of weak UK growth on Friday. However, it is possible traders are now judging the Dollar as overvalued. The DXY Dollar Index, which gauges the greenback’s value against six major currencies, reached a new 2024 high on Thursday, which could be restraining dollar-traders’ “irrational exuberance”.

Although it seems counter-intuitive, the Pound Sterling is actually strengthening despite the release of negative UK gross domestic product growth data showing the economy shrank by 0.1% in September. This was lower than the 0.2% GDP expected and 0.2% of the previous month.

What’s more, in Q3, UK preliminary GDP rose by 0.1% QoQ – decelerating from the 0.5% recorded in Q2 and undershooting the 0.2% estimate. Ordinarily, this would be expected to be accompanied by a sell-off in the Pound. However, due to an overbought dollar trade and the market’s continued faith in the outlook for growth in the UK, it has not.

For advisory service Capital Economics, the data has not materially changed its views on the outlook for Bank of England policy or interest rates – a key driver of FX valuations.

Lower interest rates are generally negative for Sterling as they reduce capital inflows and vice versa for higher rates. Yet, despite the poor economic data, they do not see the BoE cutting interest rates in December.

According to Capital’s Deputy Chief UK Economist Ruth Gregory, the GDP data means the economy grew at “…a snail’s pace (in Q3). However, this doesn’t mean the UK is on the cusp of another recession. And while today’s data raises the chances the Bank (BoE) will cut rates again in December, we are sticking to our view that the Bank will keep rates unchanged at 4.75% in December before cutting rates by 25 basis points again in February,”