Sterling faced pressure against the US dollar for a second consecutive day during Asian trading on Thursday, with the GBP/USD pair hovering near 1.3480, down approximately 0.1%. The greenback found support from oil-driven inflation concerns, which prompted markets to reprice expectations for Federal Reserve rate hikes. Additionally, geopolitical tensions between the US and Iran provided safe-haven demand for the dollar.
The dollar's strength weighed on the pound, driven by two key external factors. First, oil-driven inflation fears: ongoing Middle East tensions kept crude prices elevated, intensifying concerns about global inflationary pressures. This reignited expectations for Fed rate hikes, offering yield-based support for the dollar. Second, geopolitical risks from US-Iran tensions: negotiations over the Gulf region remained deadlocked, sustaining uncertainty around the Strait of Hormuz. As the primary global safe-haven currency, the dollar attracted additional buying.
These combined factors pushed the dollar index higher from its post-CPI data lows, becoming the main force suppressing the pound. Following the release of UK second-quarter GDP data, which met expectations, the pound weakened slightly by about 0.1%. The Office for National Statistics reported that June GDP grew by 0.3% month-on-month, significantly beating the flat forecast. The second-quarter GDP expanded by 0.4% quarter-on-quarter, in line with expectations but decelerating from the first quarter's 0.6% growth. Year-on-year, GDP rose by 1.2%, above the first quarter's 0.9% and the estimated 1.1%. The data showed solid overall performance, with services contributing notably, and no signs of the feared weakness. However, the pound dipped about 0.1% after the release, failing to gain significant traction.
Market interpretation suggests that while the second-quarter performance was acceptable, the faster year-on-year growth was largely due to base effects. Moreover, energy prices, driven higher by the Iran-related conflict, are expected to continue squeezing corporate and household budgets in the second half of the year, maintaining growth deceleration risks. Meanwhile, the dollar's relative strength further limited the pound's rebound potential.
Institutional opinions vary. Mitsubishi UFJ Financial Group noted in its August report that the pound strengthened against both the dollar and euro in July. The Bank of England held rates steady at 3.75%, but yield advantages may diminish in the future. The dollar remains supported in the short term by interest rates and geopolitical risks like the Middle East tensions. However, as inflation eases and the Fed's policy window closes, the dollar is expected to enter a depreciation cycle by 2027, which could drive a rebound in GBP/USD. Overall, the pound still ranks relatively high among G10 currencies, but significant upside in the near term is unlikely, pending signals of dollar weakness.
HSBC believes the pound is primarily driven by cyclical factors, including weak UK economic data, limited policy space for the Bank of England, narrowing relative interest rate advantages, and overall dollar strength. Political uncertainty, combined with weakening macroeconomic fundamentals, further exacerbates downside risks. HSBC maintains a medium-term bullish view on the dollar, particularly against the euro and pound, citing the Fed's stance and US economic resilience as continuing supports. Meanwhile, domestic UK factors are unlikely to provide sufficient offset. Therefore, GBP/USD is expected to gradually move towards 1.27.
In conclusion, the UK's second-quarter GDP data was solid overall, with June's 0.3% monthly growth exceeding expectations. However, the pound's slight intraday decline reflects market concerns about the energy price shock and growth slowdown in the second half of the year. Combined with the dollar's support from inflation expectations and safe-haven demand, the pound's short-term upside remains limited, and the pair is expected to trade in a choppy range.
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