Small move in the pound Thursday. But the reason behind it is worth paying attention to. UK economy shrank in April and that changes how people are thinking about what the Bank of England does next.
Economy Lost a Step in April
UK GDP fell 0.1% in April. That matched what economists were expecting so no big surprise there. But it is still a step back from March when the economy grew 0.3%.
Zoom out a bit and the trend is not great. February was up 0.4%. January was flat. March bounced. April went negative. Momentum has been fading as the year has gone on.
Part of April’s weakness is explained by what happened in March. Consumers were buying fuel early and businesses were rushing to produce ahead of expected energy disruptions linked to Middle East tensions. That made March look stronger than it normally would. April then paid the price by comparison.
Longer picture is a bit more balanced. Over the three months through April the economy grew 0.7% compared to the previous three month period. That is exactly in line with forecasts. So it is not a collapse. But it is definitely a slowdown.
Pound Gained but Not by Much
After the GDP number came out GBPUSD moved up about 20 pips and crossed back above $1.34. Twenty pips is a real move in currency markets but it is not the kind of thing that gets anyone too excited. Small and noticeable. That is about it.
Sterling has been stuck in a pretty narrow range lately. Mostly bouncing between $1.33 and $1.35. While stocks were going crazy and gold was crashing and crypto was testing key levels the pound was just sitting quietly doing very little.
Traders are not making big bets on the pound right now. Bank of England decision is coming next week and nobody wants to be caught on the wrong side of that. So volumes are light and moves are small.
Bank of England Is in a Difficult Spot
Here is the real issue. Bank of England has been thinking about whether to raise rates further to deal with inflation. Energy costs linked to Middle East disruptions and strikes on infrastructure have been pushing prices higher across Europe. Higher oil flows into transport costs, manufacturing costs, household bills. Inflation stays sticky.
Normally that would push a central bank toward raising rates. Higher rates attract capital and tend to support the currency.
But now the growth picture is getting weaker. If the economy is already losing steam the Bank of England has to think carefully about tightening too hard. Raising rates into a slowing economy is risky. It can slow things down even further.
So the pound is caught between two forces pulling in opposite directions. Inflation says rates might need to go up which is good for sterling. Weak growth says maybe not which is bad for sterling. Until the Bank of England actually makes a decision next week the pound is probably going to keep doing what it has been doing. Not much.