British Pound outperforms at the start of the UK Q2 GDP data week

The British Pound (GBP) trades higher against its major currency peers and is marginally up at around 1.3500 against the US Dollar (USD) during the European trading session on Monday. The outperformance in the British currency seems unlikely to sustain as traders seem confident that the Bank of England (BoE) will not hike interest rates in the near term despite rising oil prices prompting global inflation expectations.

BoE tone undercuts Pound despite hawkish vote split

Analysts at Rabobank highlight that "GBP net shorts bounced higher last week ahead of the BoE policy meeting," underscoring a build-up in speculative bearish positioning on the currency. They note that, while the MPC delivered "a more hawkish voting split than the market had expected," Governor Bailey’s communication was notably cautious, with his "tone" described as "dovish, suggesting little support for the pound from the BoE." This combination of a formally tighter stance but softer rhetoric is seen as reinforcing the lack of policy backing for the Pound in the near term.

This week, the major trigger for the Pound Sterling will be the preliminary United Kingdom (UK) Q2 Gross Domestic Product (GDP) data, which will be released on Thursday.

The Office for National Statistics (ONS) is expected to report that the economy expanded at a 0.4% pace, slower than the previous reading of 0.6%. On a monthly basis, the GDP is seen declining 0.1% in June after rising at a similar pace in May.

Meanwhile, the US Dollar trades marginally higher after a weak Friday. As of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades marginally higher to near 99.60.

However, financial markets expect weakness in the US Dollar in the near term, as traders don’t see the Federal Reserve (Fed) hiking interest rates at the September meeting anymore.

Dollar slide deepens as weak US jobs data cools Fed hike odds

Strategists at BNY observe that the latest US labor-market disappointment has materially shifted the policy narrative, noting that “the weaker U.S. labor-market signal has pulled down real-rate expectations, extended the Dollar decline and reopened a window for duration and risk assets.” They highlight that “last Friday’s weak U.S. nonfarm payrolls report – at -23k vs. the expected 80k – and the accompanying downward revisions meaningfully cooled expectations for a Fed hike in September, leaving the market with a less than 50% chance of a hike,” reinforcing the recent move lower in front-end rate pricing and supporting a more constructive backdrop for risk-sensitive assets.