Pound ticks up as UK data shows strong pre-war growth

Sterling rose modestly on Thursday after stronger-than-expected UK economic data lifted sentiment, while markets also tracked developments around a potential peace deal linked to the US-Iran conflict.

The pound was last up 0.1% at $1.3575.

Against the British currency, the euro slipped 0.1% to 86.94 pence.

UK growth beats expectations

Britain’s economy expanded more sharply than forecast in February, offering short-term support to the currency.

The UK Office for National Statistics said gross domestic product grew 0.5% month-on-month, marking the strongest increase since January 2024.

Economists had expected a more modest 0.2% rise.

The ONS highlighted that growth was broad-based, with the services sector contributing significantly.

Car production also recorded an increase during the month.

Growth outlook remains uncertain

Despite the upbeat data, economists warned that the momentum may not be sustained.

Rising energy costs linked to geopolitical tensions are expected to weigh on economic activity in the coming months.

Ruth Gregory, deputy chief UK economist at Capital Economics, said the recent strength could prove short-lived.

James Smith, UK economist at ING, also expressed caution.

He said he was treating the data sceptically, pointing to concerns around how the figures are calculated.

Smith and other economists have suggested that the ONS’s seasonal adjustment process may be overstating growth in the early part of the year.

Iran conflict developments support the pound

Sterling also found support from optimism that tensions linked to the US-Iran conflict could ease.

Investors have been closely monitoring diplomatic developments for signs of a possible resolution.

A key Pakistani mediator was reported to be in Tehran, while the administration of US President Donald Trump indicated that a potential agreement could be within reach.

Such a deal could reopen the Strait of Hormuz, a crucial route for global energy supplies.

The conflict had previously weighed heavily on the pound.

In March, sterling dropped 1.9% as the Strait was closed, disrupting the flow of around 20% of the world’s oil and liquefied natural gas.

The disruption weakened the UK’s economic outlook and drove investors towards the safe-haven US dollar.

Sterling recovers in April

The currency has since rebounded, gaining around 2.6% in April as market participants increasingly priced in the possibility of a peace deal.

Sterling is now trading above levels seen before the conflict began.

Expectations around UK monetary policy have also supported the pound.

Investors anticipate that the Bank of England could raise interest rates once or twice this year, improving the appeal of UK assets.

However, policymakers have signalled caution. Bank of England Governor Andrew Bailey said the central bank was "not going to rush to judgements" on interest rate rises, in an interview with the BBC published on Thursday.

Overall, while strong economic data and geopolitical optimism have lifted sterling, analysts remain wary about the sustainability of growth amid ongoing global uncertainties.