The British Pound was softer against both the euro and the dollar after a weaker-than-expected UK GDP report added to concerns that the economy has lost momentum at the start of 2026.
Pound Sterling slipped to 1.1569 against the euro and 1.3252 against the dollar as investors weighed a flat January GDP reading against the recent rise in energy prices.
Pound to Euro (GBP/EUR): 1.15691 (-0.17%)
Pound to Dollar (GBP/USD): 1.32524 (-0.74%)
Euro to Dollar (EUR/USD): 1.1455 (-0.57%)
Lloyds says the economy “made an unexpectedly weak start to the year”, with output unchanged in January against expectations for a 0.2% monthly rise.
The disappointment came from zero growth in services and a 0.1% fall in industrial output, which more than offset a modest 0.2% increase in construction.
The flat reading jars with the more upbeat message from recent business surveys.
Lloyds notes that PMIs had pointed to firmer activity early in 2026, which makes the January outturn look soft on the face of it.
Even so, the bank does not think the first-quarter outlook has collapsed.
To match the Bank of England’s forecast for 0.3% quarter-on-quarter growth in Q1, GDP would need to rise by 0.2% in both February and March, which Lloyds says is still possible.
The details suggest an uneven picture rather than broad-based weakness.
Within services, retail held up, but that was offset by sharp falls in accommodation and food services, which Lloyds links to poor weather, and in administrative and support services, where the ONS cited declines in employment activities and rental and leasing.
Manufacturing did at least rise for a third month in four, though only by 0.1%, leaving the broader industrial picture subdued.
For the British Pound, Lloyds argues the growth miss would normally have encouraged markets to price more Bank of England rate cuts.
This time, however, the rise in energy prices tied to the Iran conflict has changed the rates story.
The bank says higher energy costs risk delaying CPI’s return to target and have already pushed investors to scale back easing bets sharply.
At the time of Lloyds’ note, markets were even pricing roughly a two-thirds chance of a rate hike by year-end.
That leaves Pound Sterling caught between two opposing forces: weaker domestic growth on one side, and a more hawkish rates backdrop on the other.
Overall the January GDP miss is disappointing, but the bigger driver for the Pound sterling exchange rates is now how long the energy shock lasts and how far it spills into inflation and Bank of England pricing.
