UK Economy “Grinding Higher” Despite Rising Risks

The British Pound was little changed against the euro and dollar on Tuesday, with markets holding a cautious tone ahead of key UK data and global developments.

Pound Sterling traded around 1.1572 against the euro and 1.3353 against the dollar, as investors assessed the near-term outlook for the UK economy.

Pantheon Macroeconomics says recent data point to a mixed but not collapsing growth backdrop, with underlying momentum still holding up despite softer headline readings.

“Recent weakness reflects noise and temporary factors rather than a sharp deterioration in underlying activity,” the consultancy said.

Pantheon notes that erratic sectors have distorted recent data, masking a more gradual recovery trend. Manufacturing volatility and weather-related disruption have weighed on output, but these effects are expected to unwind in the near term.

“The economy continues to grind higher once volatility is stripped out,” Pantheon said, suggesting that underlying growth remains modest but positive.

However, risks are building. Pantheon warns that the escalation in the Middle East is likely to weigh on sentiment and activity in the coming months, particularly if higher energy prices begin to hit household incomes.

“Geopolitical tensions pose a clear downside risk to growth,” the note said, highlighting the potential drag from rising fuel costs and weaker confidence.

The consultancy also points to a softening consumer backdrop, with recent retail data indicating weaker footfall and spending during periods of poor weather. While some rebound is expected, this underscores the fragility of demand.

“Retail activity should recover as conditions normalise, but the underlying trend remains subdued,” Pantheon said.

For the Bank of England, the outlook remains finely balanced. While growth has not collapsed, the combination of modest activity and rising external risks suggests policymakers are likely to remain cautious.

For Pound Sterling, this leaves the British currency sensitive to both domestic data surprises and external developments, particularly energy prices and global risk sentiment.

In the near term, Pantheon’s view implies the pound is unlikely to find strong directional support, with modest growth and rising risks keeping markets in wait-and-see mode.