The Pound Sterling weakened following weaker-than-expected UK Q3 GDP data, showing 0.1% growth versus the anticipated 0.2%. This decline was coupled with a rise in the UK’s unemployment rate to 5%, its highest since February 2021, further fuelling economic concerns.
Market speculation about potential Bank of England interest rate cuts increased amid signs of slowing economic growth and decreasing manufacturing activity. The UK economy contracted by 0.1% in September, contrary to expectations of stagnation, with manufacturing and industrial production down by 1.7% and 2% respectively in the same month.
Currency Market Reactions
In the currency market, the Pound was weakest against the Australian Dollar, with GBP/USD rebounding near 1.3165 during European trading. The US Dollar Index fell to near 99.15 amid expectations of another Federal Reserve interest rate cut, predicted by 80% of economists surveyed by Reuters.
Technically, the GBP/USD trades below the 200-day EMA, maintaining a bearish outlook. On the political front, US President Trump signed a bill to reopen the government after a 43-day shutdown, the longest in history. Economic impacts of GDP are explored, highlighting the link between GDP growth and currency valuation.
The recent UK data paints a bearish picture for the Pound Sterling. With Q3 GDP growth at a mere 0.1% and the unemployment rate climbing to 5%, its highest since early 2021, the pressure on the Bank of England is immense. We believe this significantly increases the odds of a rate cut at the December meeting.
This view is strengthened by last week’s October inflation report, which showed CPI falling to 2.1%, undershooting expectations and easing pressure on the BoE to hold rates high. Furthermore, the latest retail sales data showed a 0.5% contraction for October, confirming that the consumer is weakening. These slowing indicators suggest the economic downturn has momentum heading into the fourth quarter.
Weakness of the Sterling
Given this domestic weakness, we should consider positioning for further Sterling downside in the coming weeks. Options strategies like buying GBP puts or establishing put spreads could be effective ways to manage risk while betting on a decline. We particularly see weakness against currencies with stronger central bank outlooks, like the Australian Dollar, which has been the best performer against the pound recently.
We have seen similar scenarios play out in the past. For instance, looking back at the period after the 2016 Brexit vote, the BoE’s shift to an easing stance led to a sustained period of Sterling underperformance. That historical precedent supports the view that a confirmed dovish pivot from the BoE could weigh on the pound well into early 2026.
The situation with the US Dollar adds a layer of complexity, as the Fed is also signalling a rate cut for December. The recent end of the 43-day government shutdown has not stopped dovish Fed commentary, and jobless claims have recently ticked higher to 245,000. This means that while our bias for the Pound is bearish, any downward move in GBP/USD might be cushioned by parallel weakness in the Dollar.
The political noise surrounding the Prime Minister ahead of the Autumn Budget introduces another risk factor that could drive volatility. Any sign of instability could spike gilt yields and put more pressure on the pound, independent of central bank policy. Therefore, traders should be prepared for sharp movements and consider using options to trade this potential volatility.
