The Pound Sterling (GBP) was weakened by sellers on Thursday when new data from the UK Office for National Statistics (ONS) revealed a larger-than-expected contraction in the UK economy in April, feeding fears of a more serious economic slowdown and a greater likelihood of additional Bank of England (BoE) rate cuts.
The ONS showed gross domestic product (GDP) fell by 0.3% month-on-month in April, or three times the 0.1% contraction predicted by analysts, after weak 0.2% growth in March-
Slump Driven by Exports and Factory Activity
The steep contraction in GDP was primarily related to a record drop in goods exports to the United States, due to new tariffs recently introduced by Washington. The ONS commented that it was “the largest monthly fall on record in goods exports to the US”, and it was broadly across almost all categories.
The overall scenario was not improved by Industrial Production falling unexpectedly by 0.6% in April and Manufacturing Production falling by 0.9%. Both indicators dropped more than expected. These data suggest further scattered weakness throughout the industrial sector, which is suffering from uncertain global demand and rising input costs.
Labor Market Data Signals Cooling
Earlier this week, UK employment data for the three months ending in April painted a concerning picture. Employers reduced headcount and hiring slowed, attributed in part to higher social security contributions. The decline in labor demand indicates that businesses are bracing for economic headwinds, which may, in turn, reduce consumer spending power in the coming months.
These signs of stress—from falling exports to labor market softening—may prompt the BoE to accelerate monetary easing.
BoE Rate Outlook
The Bank of England had already taken a dovish turn in May, cutting interest rates by 25 basis points to 4.25%. However, the April GDP miss and additional signs of economic fragility could force the BoE to deliver further rate cuts in upcoming meetings.
Markets are now increasingly pricing in the possibility that two or more rate cuts may be needed this year to support demand and cushion the impact of slowing global trade.
The next key policy event will be the BoE’s monetary policy meeting next week, alongside the UK Consumer Price Index (CPI) data for May, which could further clarify the inflation-growth tradeoff.
Despite Weak Data, GBP/USD Holds Ground
Interestingly, the GBP/USD pair is trading stronger at around 1.3575, bolstered not by domestic fundamentals but by weakness in the US Dollar. The greenback fell as investors grew uneasy over renewed trade tensions and mixed inflation signals.
President Donald Trump confirmed that the US will resume rare earth imports from China, following a high-stakes meeting in London. While this momentarily eased fears of a supply crunch, Trump’s threats to uncooperative trade partners introduced new uncertainty to global markets.
On the US economic front, traders are also eyeing the May Producer Price Index (PPI) report, due later today, for clues on inflationary pressures.
Conclusion
With US PPI due today and the UK CPI set for next week, markets await key data that could shape the Pound’s path. The BoE’s June 20 policy decision may hinge on whether inflation supports rate cuts or calls for a delay.
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