Unexpected Rise: Pound Defies Strong US Economy as Inflation Looms

The British Pound is on the move, gaining against the US Dollar despite strong economic signals from the United States. While US GDP growth smashed expectations, a cooling labor market and persistent inflation in the UK are giving the pound an edge. This unexpected dynamic has many analysts questioning why a strong US economy isn’t translating into a stronger dollar.

The US Economy: Strong GDP, But Faltering Jobs

Recent data from the US paints a mixed picture. The US economy’s Q2 GDP growth came in at a robust 3.3%, well above the 3.1% forecast. This is a significant improvement from the 0.5% contraction in the first quarter and suggests the economy is adapting to new trade policies. Yet, despite this strong headline number, the US Dollar struggled to gain momentum. The reason? A closer look at the labor market.

Initial jobless claims dipped slightly to 229,000, but a revision to the Nonfarm Payrolls report showed a slowdown in job creation. The US economy has been adding a much more modest 35,000 jobs per month recently, a significant drop from the 123,000 jobs per month seen in the same period last year. This weakening labor market has dampened the case for a Federal Reserve interest rate hike, which would typically boost the dollar.

The UK’s Inflation Problem and the BoE’s Stance

On the other side of the Atlantic, the UK is grappling with persistent inflation. Factory prices have surged to a two-year high of 1.9% year-over-year, indicating that inflationary pressures are building. In response, market participants are anticipating a more hawkish Bank of England (BoE), which is expected to hold its policy steady and resist any calls for a rate cut. This expectation of a stable or potentially higher interest rate environment in the UK is providing a tailwind for the British Pound.

As a result of these converging factors, the GBP/USD pair has been rising for three consecutive days, breaking past a key technical level at 1.3494. A sustained move above 1.3500 could open the door for further gains, potentially pushing the pair toward 1.3600. However, a drop below this level could see the pair retreat towards its 100-day Simple Moving Average at 1.3442.

With key US economic data, including the Federal Reserve’s preferred inflation gauge, on the horizon, traders will be closely watching for new developments that could shift the balance.