GBP/USD: BBH notes rising stagflation concerns as UK GDP remains unchanged

GBP/USD Weakens as UK Growth Stalls and Rate Outlook Shifts

Elias Haddad of Brown Brothers Harriman highlights that GBP/USD has slipped beneath the 1.3300 mark, remaining under pressure after the UK’s GDP figures for January revealed an unexpected standstill. With no growth recorded for the month, economic output lags behind the Bank of England’s first-quarter forecast. This stagnation, coming just before an anticipated surge in inflation driven by energy costs, heightens concerns about stagflation and has led markets to shift from expecting rate cuts to anticipating modest tightening by the end of the year.

Economic Stagnation Alters Bank of England Rate Expectations

The pound fell sharply below 1.3300, with further declines possible, after the UK economy failed to expand in January. GDP growth was flat at 0.0% month-on-month, missing the expected 0.2% increase and down from December’s 0.1%. Service sector activity was unchanged, industrial production slipped by 0.1%, while construction managed a slight 0.2% rise.

Current GDP performance is falling short of the Bank of England’s projection of 0.3% quarter-on-quarter growth for Q1.

This lack of momentum is particularly troubling as the country faces looming inflationary pressures from rising energy prices.

These developments have intensified stagflation worries and placed the Bank of England in a challenging position, a shift already evident in the market’s rapid adjustment of interest rate expectations.

Whereas markets were recently pricing in a 50 basis point rate cut by year-end, they now anticipate nearly a 25 basis point increase.

(This report was produced with assistance from an AI tool and subsequently reviewed by an editor.)