Why does the British Pound remain under pressure despite strong UK GDP and industrial output data?

• GBP/USD remains under pressure, down 1.4% over the last three days, despite recovering to 1.3260 from session lows near 1.3250.
• A strong industrial sector underpinned the UK economy’s third-quarter expansion, which matched expectations.
• Strength in the US Dollar persists, with recent US inflation readings clearing the way for additional Fed tightening in December.
  

The broader bearish trend in the British Pound (GBP) remained largely intact despite a modest recovery against the Dollar (USD) after Thursday’s UK Gross Domestic Product (GDP) and Industrial Production releases. Having recovered from session lows around 1.3250 to 1.3260, GBP/USD is still down 1.4% over the last three days.

Preliminary figures published by National Statistics on Thursday showed that UK Q3 Gross Domestic Product (GDP) rebounded 0.7% in the third quarter, following a second-quarter contraction revised downwards to 1%. On a year-over-year (Y-o-Y) basis, growth picked up from 1.4% in the preceding quarter to 1.9%. Both readings were in line with market expectations.

Robust Industrial Production helped drive the third-quarter expansion. Output increased 0.3% in September and 3.1% Y-o-Y, exceeding the respective forecasts of -0.3% and 2.9%. Meanwhile, the Index of Services, a measure of the sector’s gross value added, recorded growth of 0.9% in the three months to September, matching the pace reported in the previous month.

Are Fed tightening expectations limiting US Dollar declines?

Against most of its peers, however, the US Dollar continues to advance. Expectations of a rate increase of at least 25 basis points at the Federal Reserve’s (Fed) December meeting have strengthened following October’s US consumer inflation data and remarks from several of its policymakers.

Confidence in US monetary policy is also being supported, according to Rabobank strategists, who argue that “diminished fears about political interference on the Fed are a supportive factor for the USD,”

In a note on the outlook, Rabobank says that “reduced concerns over the credibility of the greenback should allow it more opportunity to benefit from the US’s robust economic growth performance,”

Thursday will bring further press appearances by Fed officials, including Chicago Fed President Austan Goolsbee and San Francisco Fed President Mary Daly. Both voiced concerns about high inflation earlier this week. Also due to speak is the influential New York Fed President, John Williams, whose recent remarks have hinted at a further rate increase before the year-end. For the US Dollar, risks remain tilted towards further gains.