Pound Sterling in Setback Against Euro & Dollar on GDP Disappointment

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The British pound risks a setback against the euro and dollar following the release of underwhelming UK economic data.

The UK economy shrank by 0.1% in October according to the latest monthly GDP release, disappointing against analyst expectations for growth of 0.1%.

On an annual basis, the economy grew 1.1% in the year to October, although this was below expectations for 1.4%.

The rolling three-month measure of growth was -0.1% in October, which was weaker than expectations for a flat 0%.

Following the release the pound to euro exchange rate dropped from 1.1410 to 1.1390, confirming a negative market reaction.

The pound to dollar exchange rate dropped from 1.1396 to 1.1380.

"The economy has certainly taken a hit with three contractions in the last four months and the last month of expansion coming in June. Of course the government will likely get the blame here with budget uncertainty cited as a factor causing a pull-back in activity in October ahead of the budget," says Derek Halpenny, an analyst at MUFG Bank.

Sterling has been ascendant against both the euro and dollar since late November, but these poor data threaten to blunt the advance, particularly versus the euro, as GBP/EUR is seen as more of a 'pure play' on UK economic exposure.

The market is fully priced for the Bank of England to react to a slowing economy by cutting interest rates next week.

However, as more soft data comes through bets for further reductions in 2026 will build, and this will weigh on UK bond yields and the pound.

"BoE MPC members have cited in recent public comments that there has been greater evidence of disinflation in the services sector and the GDP data will only reinforce that view and strengthens the prospect of a BoE rate cut next week," says Halpenny.

Andrew Wishart, an economist at Berenberg, says the UK economy has "faltered more dramatically than we expected."

He explains a soft patch is "a necessary evil to get inflation down."

And lower inflation means further scope for rate cuts:

"We now expect four more interest rate cuts to take the policy rate from 4.00% today to a trough of 3.00% by July 2026 (previously 3.50%)," says Wishart.

For the pound, this suggests formidable headwinds: the Bank of England could be the most aggressive cutter at a time other G10 central banks have completed their cutting cycles.

This will put notable downside pressure on UK bond yields relative to elsewhere, which will suck the pound lower.

Unless there is a growth turnaround, 2026 could be very challenging for the pound.