British Pound drifts away from 1.3500 as UK GDP slows down and Industrial Production falls

The British Pound (GBP) remained relatively stable against the US Dollar (USD) on Thursday, hovering just below the 1.3500 mark in early London trading. However, the currency's performance was hindered by contrasting UK economic indicators. While the UK's Gross Domestic Product (GDP) grew moderately at a 0.4% annual rate in Q2, consistent with forecasts, the monthly data showed a stronger 0.3% increase in June, down from the anticipated flat reading.

The slowdown in industrial production also weighed on the GBP, as June's output dropped by 0.2%, surpassing the expected 0.1% growth. May's figure was revised downward to a 0.7% decline from the earlier -0.5% estimate. The manufacturing sector also faced a setback, with production contracting by 0.5% in June, exceeding the forecasted 0.2% drop and following a 0.2% reduction in May, which was revised from a 0.1% increase.

The US Dollar remained relatively stable, with macroeconomic data from the Middle East providing some support, though recent economic data has been less favorable. The Consumer Price Index (CPI) figures for July indicated a slight decrease in inflationary pressures, and the Nonfarm Payrolls report last week further dampened expectations of a Federal Reserve (Fed) rate hike in September.

As a result, traders have reduced their bets on a quarter-point rate hike next month from 54% to 40%, according to the CME Group's FedWatch Tool. Analysts at Scotiabank suggest that recent GBP movements are primarily influenced by market sentiment, with a strong correlation to risk reversals and improving yield spreads, signaling a possible recovery.

From a technical standpoint, Scotiabank anticipates potential resistance near the 1.3600 level and support in the 1.34 region, suggesting a near-term range-bound market between 1.3450 and 1.3550 until further UK economic releases.