Sterling and the euro slipped on Thursday, trimming earlier advances as the dollar rebuilt support following a shift in market risk sentiment.
At 05:58 ET (09:58 GMT), GBP/USD was down 0.2% at 1.3539, and EUR/USD had eased 0.2% to 1.1779.
Official figures showed the UK economy expanded by 0.5% in February, a clear beat versus expectations of a 0.1% rise and following an upward revision to a 0.1% gain in January. The report described the expansion as broad-based: services output rose 0.5% month-on-month, industrial production increased by 0.5%, and construction output climbed 1.0% despite unseasonably wet conditions.
Despite the stronger-than-expected headline print, the pound did not sustain more pronounced gains as investors weighed the wider macro backdrop. Market participants appeared to focus on the fragility of recent risk appetite, prompting a partial withdrawal from risk-on positions and supporting the dollar.
Sentiment toward the dollar had softened in recent sessions as investors rotated into risk assets, but that move has been reassessed. The dollar's rebound came even as expectations persist that tensions in the Middle East may ease - a factor that had previously supported risk assets.
Analysts at ING Group argued that the recent period of dollar weakness reflected a rotation into riskier assets rather than a fundamental deterioration in the dollar's underpinnings. They noted that U.S. interest rates remain stable and found little evidence that foreign investors are materially reducing exposure to U.S. assets, which they said limits the case for a sustained or deeper dollar sell-off. ING also pointed out that the Federal Reserve seems comfortable with its current policy stance, and that steady U.S. growth and a resilient labour market make expectations for near-term policy easing premature.
In the UK, economists and strategists treated February's upbeat GDP print with caution, highlighting that early-year growth has often been distorted by seasonal effects and may not signal genuine underlying momentum. They also flagged several headwinds that could weigh on activity in the months ahead: rising energy costs, weakening real incomes, and signs of a softer labour market. These factors reinforce the view that the Bank of England is likely to keep policy unchanged for now.
Across the Channel, the euro remained close to its recent highs but showed signs of losing steam after a sharp rebound from March lows. Markets continue to price in scope for further tightening from the European Central Bank, yet ING cautioned that EUR/USD may struggle to extend its gains and that the near-term risk profile is tilted toward a pullback.
With few major economic releases on the immediate calendar, currency markets are expected to stay sensitive to shifts in global risk appetite and to evolving central bank expectations. Recent price action, analysts said, suggests investors are becoming more cautious about pressing the dollar markedly lower from current levels.
Context for market participants
- Currency traders are balancing a stronger UK GDP print against a dollar that has regained support as risk appetite recalibrates.
- Central bank expectations - notably from the Federal Reserve, the Bank of England and the European Central Bank - remain central to near-term FX moves.
- Sectors sensitive to consumer demand and input costs, such as consumer discretionary and energy, could be affected indirectly by shifts in currency-driven inflation and income dynamics.