GBP/USD turned higher after a sharp late-September slide, rebounding toward 1.3270 as revised UK growth data and softer U.S. inflation shifted rate expectations on both sides of the Atlantic. The move followed a dip to 1.32055, the pair’s lowest level since June.
The immediate catalyst was a dual macro surprise: UK second-quarter GDP was revised up to 0.5% from 0.4%, while U.S. core PCE inflation came in at 3.0%, below the 3.3% forecast. That combination lifted Bank of England hike expectations and reduced bets on another near-term Federal Reserve increase.
For currency markets, the significance is clear. Sterling had been pressured by a widening U.S.-UK policy gap after the Fed’s September rate increase, but the latest data suggests that gap may begin to close, giving GBP/USD room to recover toward resistance near 1.3345 and potentially 1.3400.
Key Facts
- GBP/USD fell to 1.32055 before rebounding to around 1.3270 in the European session.
- UK second-quarter GDP was revised up to 0.5%, compared with an initial estimate of 0.4%.
- U.S. core PCE inflation printed at 3.0%, below the 3.3% consensus forecast.
- Money markets price roughly an 80% to 85% probability of a 25-basis-point Bank of England hike on November 5.
- Fed hike odds for October dropped to 37% from 47% after the U.S. inflation data.
GBP/USD Outlook
The rebound in GBP/USD reflects a reversal in the macro drivers that had favored the dollar for most of September. Sterling had come under pressure after the Federal Reserve lifted rates to a 3.75% to 4.00% range on September 16, while the Bank of England left Bank Rate unchanged at 3.75% on September 17. That move widened the policy differential in the dollar’s favor and pushed the pair below 1.3300.
The latest data challenged that narrative. In the UK, the upward GDP revision pointed to stronger underlying economic momentum than previously thought. Business investment was a notable bright spot, with second-quarter growth revised sharply higher, while services output remained firm. In the U.S., softer core PCE inflation weakened the case for an immediate follow-up Fed hike, pulling Treasury yields lower and reducing support for the dollar.
This matters because GBP/USD is highly sensitive to relative rate expectations. If the Fed pauses while the Bank of England moves in November, the 25-basis-point gap that opened in mid-September could disappear. That would shift the market’s focus from dollar carry back to sterling’s yield support, particularly as traders reassess whether the pound’s September selloff went too far.
With UK growth revised higher and U.S. inflation coming in softer than expected, the policy gap that hurt sterling in September is no longer widening in the dollar’s favor.
Why the rate gap is driving the pair
The Bank of England’s September decision was more hawkish than the headline hold suggested. The Monetary Policy Committee voted 6-3 to keep Bank Rate at 3.75%, with three members already supporting a move to 4.00%. That leaves the market focused on November 5 as a live meeting, especially with UK inflation at 3.1% in August and energy costs still posing upside risks.
On the U.S. side, the inflation surprise reduced confidence in an October move. The drop in two-year Treasury yields after the PCE release showed that traders are increasingly sensitive to signs of cooling price pressure. For GBP/USD, that creates a more balanced policy outlook than the one that dominated immediately after the Fed decision.
Technical levels reinforce the macro picture. Support remains at 1.32055, followed by the June 25 low of 1.3164. On the upside, resistance sits near 1.3300, then 1.3344 and 1.3400. A recovery through 1.3344 would suggest that the post-Fed selloff is fading, while a daily close below 1.32055 would likely reopen downside risk toward the yearly low.
Implications for Investors
For investors with exposure to UK assets, the shift in GBP/USD is important beyond the currency market itself. A firmer pound can ease imported inflation pressure and may help stabilize sentiment toward domestically focused UK equities. At the same time, expectations of further Bank of England tightening can weigh on rate-sensitive sectors, particularly housing, utilities and highly leveraged companies.
Bond investors should pay close attention to the distinction between higher yields driven by monetary tightening and higher yields driven by fiscal concerns. UK gilt yields near multi-year highs can support sterling when they reflect expectations of additional rate increases. But if yields rise because of concern over government borrowing or an unconvincing budget, the pound may struggle even with a hawkish central bank.
For global portfolios, the near-term watch points are clear: the U.S. labor market report, mid-October UK inflation data, the October 28 UK budget and the November 5 Bank of England decision. If U.S. data stays soft and UK inflation remains sticky, GBP/USD could continue recovering toward 1.3345 to 1.3400. If U.S. payrolls reaccelerate or UK fiscal risks intensify, the dollar could regain the upper hand quickly.
The balance of risks has improved for sterling, but the next leg in GBP/USD will depend on whether softer U.S. inflation proves durable and whether the UK can combine tighter monetary policy with fiscal credibility. For now, the pair appears to have found support, with October shaping up as the key test for a broader recovery.