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Sterling faces threats to its recent strength in the form of GDP and inflation data.
The pound strengthened against the US dollar on Tuesday and remains close to a 15-month best against the euro, which continues to trade under heavy pressure.
While sterling has got off to a positive start to the week, tomorrow morning’s GDP data could threaten its recent advances. The UK achieved the fastest growth rate of the G7 nations in the first half of 2026, but economists expect a minor slowdown in August, which would conform to the recent pattern of good growth to start the year followed by a period of more sluggish activity.
The chancellor did his part to support the pound, with several media outlets reporting his pledge to steer clear of increased borrowing to fund the expected cost-of-living measures in the upcoming Budget (28 October). That course of action would be in line with guidance from the International Monetary Fund (IMF), whose annual World Economic Outlook warned about ballooning debt in developed economies.
Currency markets also have their eye on the IMF/World Bank meetings in Bangkok (a tough ask given the six-hour time difference from the UK). This morning, the European Central Bank’s Christine Lagarde argued that France would find the solution to its own debt troubles in spending discipline.
The US dollar’s retreat has handed today’s US inflation report a particularly important role. A stronger reading would revive expectations of another Federal Reserve rate rise and could put the dollar back on the front foot. Softer figures would strengthen the case for policymakers to hold fire for now.
Tuesday was a relatively tricky day for the wider financial landscape. As earnings season gets under way, a number of AI chip names were dragged down by fears of competition from China. Things weren’t helped by stubbornly elevated oil prices, although borrowing costs did drop just a smidge for most Western debtors.
Overnight, we heard China’s trade surplus increased to a whopping $133bn, the largest since January 2025. Exports smashed estimates as the AI boom boosted demand for Chinese technology.
GBP: Pill questions rate hikes
The Bank of England's chief economist Huw Pill signalled his skepticism that the Bank would have scope to increase interest rates four times over the coming year. Currency markets are currently pricing in a full percentage point of hikes (taking interest rates to 4.75%), but Pill argued he would need to see inflationary risks coalesce in a more concrete way for this to happen.GBP/USD: the past year
EUR: Recovery looks fragile
The euro was able to make the most tentative of recoveries yesterday, advancing by just under half a cent against the US dollar on slightly reduced global bond yields. Another round of French bond auctions tomorrow morning could improve the mood or make things even worse. For this and many other reasons, there is a real sense of uncertainty haunting the euro at the moment.GBP/EUR: the past year
USD: Bracing for inflation
This afternoon’s inflation report looks set to be exceptionally significant for the US dollar. Headline inflation is expected to have increased to 3.6% in September, but markets are bracing for some steep movements should those numbers land hotter or colder than expected.USD/GBP: the past year
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