Pound Sterling Holds Vs Euro And Dollar Despite Jump In UK Bond Yields

The Pound Sterling held steady against both the US dollar and the euro on Friday as UK gilt yields edged higher following stronger-than-expected GDP data, although markets remain cautious about the sustainability of the growth rebound.

This week’s UK GDP data came in stronger than expected.

Markets may have been too gloomy in their outlook, and a re-assessment could mean yields start to rise again.

However, one positive reading is not enough evidence for a sustained move higher in yields.

A trend in the data is needed to ease concerns over the economy.

The British Pound has held steady this week and GBPUSD is trading at 1.34 on Friday, around the same level as Monday’s open.

Data has been on the light side in the UK and the EU, with geopolitics and US data getting most of the attention.

However, Thursday’s stronger than expected GDP data in the UK has had an effect on yields, and that may spill over into correlated markets if it is sustained.

Yields Rise on Growth Optimism

Gilt yields remained stubbornly high in 2025, but they started to ease towards the end of the year as inflation likely peaked and the tightness in the labour market moderated.

The latter was a powerful driver as it meant wage growth dropped.

It also caught the attention of the Bank of England and likely factored into several of its cuts – a cooler labour market was needed to tame inflation, but alarm bells were ringing as there were concerns it was weakening too fast.

There has also been some concern over a stagnant economy brought on by a combination of domestic policy uncertainty (the budget), a sharp increase in business operating costs, and persistent inflationary pressures that forced the Bank of England to maintain a restrictive monetary stance for much of the year.

The private sector faced a severe labor-cost shock due to a dual increase in the National Living Wage and employer National Insurance contributions.

These rising overheads squeezed profit margins and led to a marked slowdown in hiring, with many firms opting to shed staff.

This environment started to weigh on long term yields as it suggests the BoE would have to keep its rates low in the long term.

However, this week’s GDP data suggested the outlook may not be as weak as many feared.

A 0.1% estimate for November’s growth was beaten significantly with a 0.3% reading.

This caused an increase in yields, although Sterling was unmoved.

As ING point out,

“When you see 5Y rates underperform the rest of the curve, markets are signalling a more positive take on the business cycle.

In effect, this also pushes back the Bank of England’s easing expectations.

And indeed, the probability of a rate cut in March is gradually falling, with now just 9bp priced in.”

Less cuts could be good news for the Pound, but one positive GDP does not make a trend, and there are still concerns over growth in 2026.

The outlook remains precarious as several of the structural drags that defined the previous year continue to loom over the British economy.

A primary concern for analysts is the trajectory of the labor market, where the delayed impact of 2025’s tax hikes and wage increases may finally manifest in a more pronounced rise in unemployment.

Fiscal policy is also expected to provide less of a tailwind in 2026 compared to previous recovery cycles.

Government spending is projected to tighten as the Treasury seeks to stabilize debt-to-GDP ratios, leaving a vacuum that private investment may be slow to fill.

Investment confidence remains fragile, particularly as global trade tensions and the potential for new tariffs create a climate of geopolitical uncertainty.