Economy Stalls, But Pound Sterling Holds Uptrends against Euro, Dollar
- Written by: Gary Howes
Image © Adobe Images
The British pound holds short-term uptrends against the euro, dollar and other major currencies, despite news the UK economy stalled in the third quarter.
The ONS said the economy grew just 0.1% in Q3, which was in line with estimates but down on the second quarter's 0.2% growth, which was itself downgraded from the initial 0.3% estimate.
On December 12, it was reported the economy shrank 0.1% in October.
"The UK economy is grinding to a halt and showing little sign of achieving what it did in the first half of the year," says Lindsay James, investment strategist at Quilter.
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The latest data highlights a significant loss of momentum: the economy grew 0.7% in the first quarter, largely due to government spending.
Despite the headlines, the pound has shown resilience, defending gains made in the wake of last Thursday's Bank of England decision.
It has carved out some short-term 'mini' uptrends against both the euro and dollar, which should hold into early 2026, particularly now that news and data should dry up over the Christmas period:
The pound to euro exchange rate has risen to 1.1433, having been as low as 1.1285 in mid-November.
The pound to dollar exchange rate rises to 1.34 once more, having been as low as 1.3311 last week and 1.3010 in mid-November.
The pound's November lows against both the euro and dollar confirm that the currency underwent a significant downward adjustment ahead of the November 26 budget.
The subsequent recovery confirms post-event relief. Also, last Thursday's Bank of England interest rate cut was well anticipated beforehand, while the Bank's guidance didn't indicate any clear commitment to further rate reductions.
Further gains against the dollar are possible on account of broader USD weakness linked to expectations for interest rate reductions at the Federal Reserve in 2026.
However, strength against the euro might prove relatively short-lived on account of the UK's slowing economy: remember, the pound-euro best reflects investor perceptions on the UK economy.
"Going forward, November’s Budget measures will do nothing for growth after the OBR forecasted zero impact from the policies introduced at the despatch box," says James.
"The pound has long been supported by a hawkish BoE, which we expect to slowly fade over the course of 2026 and translate into a somewhat weaker outlook," says UBS in a just-published year-ahead FX market assessment.
