GBP/USD Near 1.35 as UK Growth Rebound Faces a Quality Test

GBP/USD is trading around 1.35 on 11 August, close to its strongest level in more than three weeks.

Reuters’ latest delayed quote put sterling at approximately $1.3508 early on Tuesday, after the pound had already reached $1.3502 on Monday.

That level looks reasonably strong considering the debate taking place underneath the UK economy.

The Bank of England is keeping Bank Rate at 3.75%. Three policymakers wanted another increase in July. British retail spending has held up better than expected, recruitment surveys are beginning to stabilise and investors are waiting for another apparently respectable GDP report on Thursday.

But there is a problem with simply calling this a strong UK economy.

A surprisingly large share of the recent improvement has appeared in areas affected by the football World Cup, exceptionally warm weather and other temporary factors. Meanwhile, the Bank of England itself estimates that underlying growth remains much weaker than some headline data suggest.

That makes the current 1.35 level interesting.

The market is not only deciding whether Britain is growing.

It is deciding how much of that growth deserves to be priced into sterling after the temporary boost disappears.

Thursday’s GDP report is really a test of growth quality

The Office for National Statistics will publish the first estimate of UK GDP for April to June, together with the June monthly GDP estimate, on 13 August.

The headline number will naturally receive most of the attention.

But the composition may matter more for GBP/USD.

Recent Reuters coverage says markets expect the figures to show a relatively resilient second quarter, helped in part by stronger consumer activity and lower energy pressure. British retail spending during June was particularly strong.

The Bank of England is much less enthusiastic about the underlying picture.

Its July Monetary Policy Report estimates that underlying GDP growth was only around 0.1% in the second quarter and projects it slowing to approximately zero during the third quarter. The Bank expects growth to remain subdued through 2026 and early 2027 as high energy costs and restrictive financial conditions continue to affect household spending.

Those two views are not necessarily contradictory.

The UK can publish a respectable headline GDP number while the economy underneath it remains weak.

That distinction is exactly what sterling traders need to resolve.

June retail sales were strong, but the reason matters

UK retail sales volumes jumped 1.0% in June when economists had expected a 0.3% decline.

Warm weather and the football World Cup were major contributors. Consumers bought summer clothing and cooling products, while online sales reached their highest share of total retail activity since April 2021.

That is genuine economic activity.

A shop selling more fans, clothing or food during an unusually hot month still generates real output.

A pub serving more customers during a World Cup match also contributes to GDP.

The problem for currency valuation is repeatability.

England cannot reach the same stage of the World Cup every month.

Temperatures cannot repeatedly provide the same seasonal boost.

A one-off consumer event can improve quarterly GDP without changing the economy’s sustainable growth rate.

That is why a good Thursday headline may not automatically justify another leg higher in GBP/USD.

July spending already shows the difference between activity and momentum

More recent retail surveys provide a useful warning.

The British Retail Consortium reported that total sales increased 1.3% from a year earlier in July. Food sales rose 3.8%, helped by football-related spending and home entertaining, but non-food sales fell 0.7%. Overall sales growth also slowed from 1.9% in June and remained below the six-month average.

This is not a consumer collapse.

It is also not broad-based strength.

Households were still willing to spend on food, smaller discretionary items and experiences.

They remained more reluctant to make larger purchases.

That matters because a sustainable consumption recovery normally becomes broader over time.

If economic activity remains heavily concentrated in event-driven spending, it provides less evidence that households are becoming confident enough to support a lasting acceleration in growth.

Individual retailers make the same point

Some British companies have reported impressive results.

Next increased its annual profit forecast again after second-quarter full-price sales rose 9.2%, considerably better than the company had expected. Warm weather supported UK demand, while overseas sales were particularly strong.

Domino’s Pizza also benefited from increased demand during the World Cup, with first-half underlying earnings improving from the previous year.

These are positive corporate developments.

But they also illustrate why the macroeconomic data need to be interpreted carefully.

Strong summer trading does not necessarily mean business investment, productivity, industrial production or household real incomes are all accelerating at the same rate.

Sterling needs more than busy shops and restaurants if the market is going to price a substantially stronger UK growth cycle.

Construction is improving from a very weak level

The construction sector provides another example of why “better” and “strong” are not the same thing.

The UK construction PMI increased sharply to 44.7 in July from 38.4 in June, beating forecasts and signalling that the severe downturn in the sector was easing.

But 44.7 is still below the 50 level separating expansion from contraction. Commercial construction and housebuilding continued to shrink, even though the pace of decline became less severe.

This matters for interpreting a future GDP rebound.

If construction moves from collapsing rapidly to contracting more slowly, the change can improve growth statistics.

Yet economic activity in the sector is still falling.

A currency market looking only at the direction of the PMI change may see recovery.

A market looking at the level sees an industry that remains under pressure.

GBP/USD around 1.35 is sitting directly between those two interpretations.

The jobs market is stabilising, not booming

Recent recruitment data tell a similar story.

The REC/KPMG survey showed permanent job placements rising to an index level of 50.0 in July from 49.1, ending a 45-month period in which the measure had remained in contraction territory. Starting salaries also increased more rapidly.

This is encouraging.

It suggests the labour market may have stopped deteriorating at the same pace.

But a reading of 50 does not indicate a powerful hiring expansion.

It indicates stability.

Official ONS data published in July had shown payrolled employment down about 90,000 over the year in the March-to-May period and down around 30,000 from the previous quarter.

The labour market therefore appears to be moving from deterioration towards stabilisation.

That transition can support sterling because it reduces the risk of an abrupt downturn.

It does not yet provide evidence of a new employment boom capable of generating much stronger consumer spending.

This distinction matters because markets are still pricing another BoE hike

The Bank of England held Bank Rate at 3.75% at its July meeting by a 6–3 vote.

Three MPC members wanted an immediate increase to 4%.

That hawkish minority gives sterling an important source of support.

Markets currently expect roughly one additional BoE rate increase before the end of 2026, according to Reuters. They also price another move further into 2027.

But that expectation has to survive the growth data.

ING strategist Francesco Pesole warned that current BoE pricing could prove too aggressive, which would leave sterling vulnerable if investors begin removing expected tightening from the curve.

This makes Thursday’s GDP report more important than an ordinary growth release.

It is effectively testing whether the market is justified in combining a 3.75% Bank Rate with another expected increase.

A good GDP number does not automatically make a rate hike more likely

There is an easy trap here.

Strong GDP equals stronger economy.

Stronger economy equals higher rates.

Higher rates equal stronger pound.

The actual relationship is less mechanical.

Suppose GDP looks good because consumers spent heavily during the World Cup and warm weather.

If the BoE believes that activity will disappear in the following quarter, it does not need to respond with higher rates.

The central bank is interested in sustainable demand and inflation pressure, not whether a temporary event made one quarter look unusually strong.

Its July Monetary Policy Report already says underlying growth is weak and projects little momentum during the third quarter.

A strong headline on Thursday therefore helps sterling most if the details show the improvement spreading beyond temporary retail activity.

The BoE’s 6–3 vote creates a higher hurdle for weak growth

There is another side to the argument.

Three MPC members already believe 3.75% is not sufficiently restrictive.

That means the Bank does not require spectacular GDP growth before considering another increase. Inflation risks still matter heavily in the decision.

For GBP/USD, this creates an unusual setup.

Weak growth alone may not immediately destroy the pound because inflation can preserve the possibility of higher rates.

But strong growth alone may not produce a large rally because much of it may already be temporary.

Sterling therefore benefits most from a particular combination:

growth that is broad enough to look sustainable,

without inflation becoming so severe that it damages real incomes.

The UK is not clearly in that position yet.

The recent oil rebound complicates the picture again

Brent crude climbed to around $88 per barrel on 11 August as negotiations involving Iran and the reopening of the Strait of Hormuz remained unresolved.

For Britain, higher energy prices create two opposing currency effects.

They can increase inflation and strengthen the argument for keeping BoE rates high.

But they also reduce household purchasing power and raise business costs.

That means an energy-driven increase in expected interest rates is not necessarily as positive for sterling as a rate increase generated by strong domestic demand.

The BoE itself expects the energy shock to restrain real-income growth and household consumption over the coming quarters.

This is another reason the market needs to examine the composition of UK growth rather than only the headline number.

GBP/USD at 1.35 is also benefiting from a weaker dollar backdrop

Sterling’s recent performance is not purely a UK story.

The US dollar was hit by the unexpectedly weak July employment report, which reduced expectations that the Federal Reserve will raise rates again in September.

On Monday, the dollar index was around 99.8 and close to a two-month low, while markets had lowered September hike expectations considerably from the previous week.

That matters when interpreting GBP/USD.

The pair can rise because investors want more pounds.

It can also rise because investors want fewer dollars.

At the moment, both effects are present, but the second has been particularly important.

One useful piece of evidence is EUR/GBP.

Sterling was roughly unchanged against the euro around 85.62 pence on Monday even while GBP/USD remained near a multi-week high.

That suggests at least part of the pound’s move against the dollar reflects USD weakness rather than a dramatic revaluation of UK fundamentals.

This makes the next stage harder than the move to 1.35

The path from the low-1.33 area back towards 1.35 benefited from deteriorating US rate expectations.

Moving substantially beyond 1.35 may require more help from Britain itself.

If the UK data merely confirm that temporary summer spending boosted activity, sterling may struggle to find a fresh domestic catalyst.

The market already knows retail sales were strong.

It already knows three MPC members favour higher rates.

It already knows the US labour market disappointed.

The next rally therefore requires genuinely new information.

Thursday’s GDP breakdown can provide it.

What would make the GDP report genuinely bullish for sterling?

The strongest result would not necessarily be the largest headline GDP number.

The composition would need to look convincing.

A broad increase across services, industrial production and construction would be more valuable than another quarter dominated by retail and temporary consumer events.

Business investment would also matter.

If companies are increasing capital expenditure despite restrictive rates and geopolitical uncertainty, the economy has a stronger foundation for continued growth.

Household spending outside temporary categories would provide another positive sign.

Under that combination, markets could become more confident that current BoE tightening expectations are supported by genuine domestic resilience.

GBP/USD would then have more justification for holding above 1.35 rather than depending primarily on a weak US dollar.

A good headline with weak details could produce the opposite reaction

FX markets frequently move against an apparently positive economic release because the headline had already been priced.

That risk is unusually high this week.

Recent retail numbers have already given investors reason to expect respectable second-quarter activity. Reuters has also highlighted the expectation that World Cup and warm-weather spending will contribute positively to the figures.

If the GDP headline is strong but the breakdown shows weak business investment, continued construction contraction and limited underlying consumption, the market may decide there is little new information.

Sterling could initially rise and then lose the gain.

That would be especially likely if investors simultaneously question whether the BoE really needs another increase.

A weak report would challenge the rate story much more directly

A disappointing GDP release has a clearer currency implication.

If growth comes in materially weaker than expected—or June shows that the earlier retail strength failed to spread through the economy—the market may begin reducing the probability of another BoE increase.

That would attack one of sterling’s main advantages.

The current 3.75% Bank Rate is already high.

What supports the currency at the margin is the belief that it may become even higher or remain restrictive for longer.

If weaker growth turns that expectation into a prolonged hold followed eventually by easing, the pound loses some of its rate premium even before the BoE actually changes policy.

This is why Thursday’s downside surprise may have a larger GBP/USD impact than a modest upside surprise.

1.35 is becoming a test of whether sterling can generate its own demand

GBP/USD around 1.35 now provides a useful dividing line.

A sustained move above 1.3550–1.3600

A move through this area would be more credible if UK GDP shows broad growth rather than another temporary consumer boost.

It would indicate that investors are beginning to combine dollar weakness with a genuinely stronger view of Britain.

If UK yields also rise because BoE tightening expectations strengthen, the move would have a clearer domestic foundation.

Continued trading around 1.3450–1.3550

This would fit the current evidence well.

Sterling would remain supported by a high Bank Rate and a less pessimistic UK growth outlook.

But investors would still lack enough evidence to conclude that the economy has entered a substantially stronger expansion.

The pair could then remain heavily dependent on incoming US data.

A return below 1.3400

A sustained move below 1.34 after Thursday’s release would suggest the UK side of the sterling rally is beginning to disappoint.

The signal would be stronger if short-term UK yields fall at the same time as investors remove expectations of another BoE increase.

At that point, the market would be treating the recent growth improvement as more temporary than structural.

The biggest question is what remains after summer

The UK economy has enjoyed several useful short-term supports.

Warm weather lifted retail activity.

The World Cup boosted spending in food, pubs and other consumer categories.

Construction conditions stopped deteriorating as rapidly.

Recruitment surveys showed the first signs of stabilisation.

These developments are real.

But sterling valuation depends increasingly on what remains once those temporary effects fade.

If households continue spending after the football tournament ends, companies resume hiring, construction crosses back into expansion and business investment strengthens, the recent improvement will look like the beginning of a more durable recovery.

If those indicators fade again, the stronger summer data will look more like a temporary interruption in an economy whose underlying growth remains close to zero.

That difference matters far more for GBP/USD than whether one quarterly GDP print beats consensus by a tenth of a percentage point.

GBP/USD assessment

GBP/USD near 1.35 currently looks stronger than the underlying UK economy.

That does not mean the pound is wrongly priced.

Sterling has several legitimate supports.

Bank Rate is 3.75%, three MPC members want 4%, recruitment conditions are stabilising and retail activity has been stronger than expected. At the same time, the US dollar has weakened after a poor employment report reduced expectations of additional Fed tightening.

The weakness lies in the quality of British growth.

The Bank of England estimates underlying second-quarter growth at only around 0.1% and expects virtually no underlying expansion in the third quarter. Construction remains in contraction, while much of the recent consumer strength has been associated with unusually warm weather and World Cup spending.

That makes Thursday’s GDP release less about whether Britain grew and more about what produced the growth.

A broad improvement would give sterling a domestic reason to extend beyond 1.35.

Another apparently strong headline dominated by temporary consumption would leave the pair much more dependent on continued weakness in the US dollar.

The current rally has already proved that Britain is not performing as badly as some investors feared.

The next step requires evidence of something stronger:

that the economy is improving even after the temporary summer boost is stripped away.