The Pound Sterling was broadly steady against the Euro and the US Dollar on Thursday despite fresh signs of economic weakness, as UK GDP showed near-stagnation in the fourth quarter and reinforced expectations for further Bank of England rate cuts later this year.
Pound to Euro (GBP/EUR): 1.14861 (+0.11%)
Pound to Dollar (GBP/USD): 1.36242 (+0.04%)
Euro to Dollar (EUR/USD): 1.18614 (-0.07%)
The outlook for the UK economy and the pound took another dent on Thursday as GDP figures revealed an economy struggling to grow.
According to the latest data, the British economy expanded by a mere 0.1% in the fourth quarter, bringing total growth for the year to a modest 1.3%.
While this weak finish was not entirely unexpected, the underlying components of the report highlight areas of concern that could shape the fiscal and monetary narrative well into 2026.
One of the most striking aspects of the release was the contraction in business investment and construction.
Business investment fell by 2.7% in the final months of the year, while the construction sector declined by 2.1%.
Although some weakness can be linked to uncertainty around the Autumn Budget, the broader slowdown reflects the ongoing impact of restrictive interest rates.
The Bank of England’s previous rate-hiking cycle continues to weigh on activity, and policy remains tight by historical standards.
The outlook for 2026 remains cautious.
Growth is forecast to slow to around 1.0% as fiscal tightening and softer consumption converge.
Inflation is expected to fall toward the BoE’s 2% target by April, but rapidly slowing wage growth could offset any improvement in household purchasing power.
Real disposable incomes are likely to remain broadly flat, limiting the scope for a meaningful consumption rebound.
Fiscal policy is also turning more restrictive.
Slower departmental spending growth and frozen tax thresholds will act as a drag, while a fragile labour market leaves little margin for error.
For the Bank of England, this reinforces the case for eventual easing.
If unemployment rises further and wage growth continues to moderate, a March rate cut remains possible.
Sterling absorbed the GDP release relatively well.
The Pound even edged slightly firmer against the euro, pushing EUR/GBP toward 0.87, suggesting that the weak growth print largely confirmed existing expectations rather than delivering a fresh shock.
US Data Fails to Lift the Dollar
Wednesday’s US jobs report delivered stronger headlines.
Nonfarm payrolls rose by 130,000, the highest in a year, while unemployment dipped to 4.3%.
Stocks and the dollar initially moved higher, but gains faded as markets digested downward benchmark revisions.
Total payroll gains for 2025 were revised sharply lower from 584,000 to 181,000.
That implies average monthly job growth of just 15,000 last year, concentrated heavily in healthcare and hospitality rather than broader cyclical sectors.
The Federal Reserve is therefore likely to remain on hold for now.
Unless labour conditions deteriorate quickly, policy easing may not resume until mid-year.
The US dollar could not sustain its post-NFP rally and is lower on Thursday.
Friday’s US inflation data may generate short-term volatility, but it is unlikely to materially shift the Fed’s policy stance.
