Key Takeaways

• Pound slips: GBP/USD fell 0.01% to 1.3520, while EUR/USD eased 0.02% to 1.1712.
• Strong UK GDP: Q1 GDP grew 0.6% quarter-on-quarter, in line with expectations and up from Q4’s 0.2%.
• Annual surprise: GDP expanded 1.1% year-on-year, beating the 0.8% consensus.
• March defies forecasts: Monthly GDP rose 0.3% versus expectations for a 0.1% contraction.
• Services lead: The services sector was the primary growth driver, with construction and production also expanding.
• Skepticism on the data: ING’s Francesco Pesole notes a consistent pattern since 2022 of strong Q1 prints that fade — pointing to seasonal adjustment distortions.
• Leadership challenge: Health Secretary Wes Streeting is reportedly preparing a leadership challenge against PM Keir Starmer.
• Limited market reaction: Starmer’s potential departure was partially priced in, and Streeting’s centrist positioning limits fiscal risk premium.
• EUR/GBP overvaluation contained: Short-term overvaluation sits at around 0.3%, suggesting markets aren’t yet alarmed.
• Gilts the risk: Pesole flagged downside risks could spike if gilts take a hit from political escalation.
• Energy shock weighs: Middle East crisis is pressuring manufacturing while pushing import costs higher.
• Burnham the wild card: Manchester mayor Andy Burnham’s ambitions are a tail risk given his prior comments on abandoning the fiscal rule.

Sterling edged lower against the dollar on Thursday despite a stronger-than-expected GDP reading, as political uncertainty in Westminster continued to overshadow an otherwise solid macroeconomic print.

As of 05:02 ET (09:02 GMT), GBP/USD fell 0.01% to 1.3520, while EUR/USD slipped 0.02% to 1.1712, with both pairs trading in negative territory during early European hours.

The UK economy grew 0.6% quarter-on-quarter in Q1 2026, in line with expectations and accelerating from a 0.2% rise in Q4 2025, according to a first reading from the Office for National Statistics.

On an annual basis, GDP expanded 1.1% — ahead of the 0.8% consensus — while the monthly GDP print for March came in at 0.3%, defying expectations of a 0.1% contraction. The services sector was the primary driver, with construction and production also expanding.

Markets Skeptical Despite the Beat

Despite the beat, sterling failed to rally. ING’s Francesco Pesole cautioned that markets remain sceptical of the Q1 figures, noting a consistent pattern since 2022 of strong first-quarter prints that fade through the remainder of the year — pointing to seasonal adjustment distortions rather than genuine underlying momentum.

Westminster Drama Takes Center Stage

Political risk has become the more immediate driver for the pound. Reports that Health Secretary Wes Streeting is preparing a leadership challenge against Prime Minister Keir Starmer added to the noise, though the market reaction was muted.

Pesole noted that a potential Starmer departure had been partially priced in, and that Streeting’s centrist positioning within Labour limits the immediate fiscal risk premium.

EUR/GBP short-term overvaluation remains contained at around 0.3%, suggesting markets are not yet alarmed, though Pesole flagged that downside risks remain elevated if gilts take a hit from further political escalation.

Energy Shock and Tail Risks Loom

The broader backdrop for sterling stays fragile. The Middle Eastern energy shock continues to pressure the manufacturing sector while pushing import costs higher — complicating the Bank of England’s inflation outlook.

Pesole also highlighted Manchester mayor Andy Burnham’s ambitions to replace Starmer as a key tail risk, given his previous comments on potentially abandoning the fiscal rule — a development markets would treat with considerably less equanimity than a Streeting challenge.