Sterling fell marginally against the dollar on Thursday even after the Office for National Statistics published a Q1 GDP reading that beat some expectations. At 05:02 ET (09:02 GMT), GBP/USD was quoted at 1.3520, down 0.01%, while EUR/USD was trading at 1.1712, down 0.02% in early European trade.
The first estimate of UK gross domestic product showed quarter-on-quarter growth of 0.6% in Q1 2026. That represented an acceleration from the 0.2% increase recorded in Q4 2025 and matched the consensus outlook for the quarter. On a year-on-year basis, GDP rose 1.1%, ahead of the 0.8% consensus, and monthly GDP for March posted a 0.3% increase, defying expectations for a 0.1% contraction.
The services sector led the expansion, with both construction and production contributing to the quarterly gain. Despite the upside surprises in the headline numbers and the monthly outturn for March, the pound did not mount a sustained rally.
Francesco Pesole of ING warned that market participants remain doubtful about the Q1 outcome. He pointed to a recurring pattern since 2022 in which robust first-quarter prints have tended to fade over the rest of the year, suggesting that seasonal adjustment distortions may be driving some of the apparent strength rather than persistent underlying momentum.
Political developments in Westminster were a more immediate focus for traders. Media reports that Health Secretary Wes Streeting is preparing a leadership challenge to Prime Minister Keir Starmer added to the political noise, although immediate market responses were muted. Pesole said that a potential departure by Starmer had been partially factored into prices, and he noted that Streeting's centrist positioning within the Labour party limits any prompt increase in the fiscal risk premium.
Short-term overvaluation of EUR/GBP is estimated at around 0.3%, a level that Pesole described as contained and not yet indicative of widespread market alarm. Nonetheless, he cautioned that downside risks to sterling remain elevated if gilts come under fresh pressure as political developments escalate.
Beyond politics, the wider environment for the pound remains fragile. An energy shock originating in the Middle East is continuing to pressure the manufacturing sector while also exerting upward pressure on import costs, a combination that complicates the Bank of England's outlook for inflation and its policy response.
Pesole also flagged another political tail risk: Manchester mayor Andy Burnham's reported ambitions to replace Starmer. He highlighted Burnham's prior remarks about potentially abandoning the fiscal rule, noting that markets would treat such a policy shift with considerably less equanimity than a Streeting challenge.
Market snapshot:
- GBP/USD: 1.3520, down 0.01% (05:02 ET / 09:02 GMT)
- EUR/USD: 1.1712, down 0.02%
- UK Q1 GDP: +0.6% quarter-on-quarter (Q1 2026)
- Year-on-year GDP: +1.1% (consensus 0.8%)
- March monthly GDP: +0.3% (expected -0.1%)