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The Pound is retreating from recent highs against the U.S. Dollar, but weakness is likely to be temporary.
The Dollar strengthened and stock markets fell through the midweek session as investors chewed over a soft U.S. GDP report that showed the economy shrank in the first quarter (-0.2% q/q).
This was the first decline in three years, which disappointed a market that expected a flat reading to follow Q4 2024's 0.4% q/q reading.
"Stagflation concerns were bolstered by Wednesday's data showing an unexpected contraction in U.S. GDP during the first quarter along with a surprisingly large jump in core PCE prices," says Paul Spirgel, a Reuters market analyst.
Disappointment was painted on the S&P 500 stock index, which is trading lower on the day alongside other major U.S. bourses.
In 2025, the Dollar and U.S. stocks have tended to fall together, which means the USD advance is a surprise and raises questions as to whether the Dollar is regaining its safe-haven status.
It is too soon to suggest this is the case because it is the final day of the month, and month- and quarter-end flows are likely distorting the market. Investment bank analysts have suggested that USD strength should be expected.
Dollar strength also suggests the U.S. GDP data was not as bad as the headline decline suggests, given there were some significant distortions caused by importers front-running Trump's tariffs.
According to economist Atakan Bakiskan at Berenberg Bank, "the main drag on growth came from a sharp widening in the trade deficit, as businesses frontloaded imports to stay ahead of tariffs."
He says consumption softened only modestly and households increased spending by 1.8% q/q (annualised) after 2.8% growth in 2024, with a stronger tilt towards services, which rose 2.4%, while goods consumption increased by only 0.5%.
In fact, when adjusted for imports and inventories, which do not reflect underlying economic strength due to the frontloading effect, real GDP in the US rose around 2.3% q/q.
"Despite mounting downside pressures on growth, the US economy remains solid for now," says Bakiskan.
The Dollar's advance saw the Pound to Dollar exchange rate retreat further from three year highs at 1.3444. When that high was reached on Tuesday we warned about a strong horizontal resistance level that could deal Sterling a setback.
This layer of resistance has shown its teeth and Pound-Dollar's retreat extends back to 1.3310 at the time of writing.
For now, strategists maintain a 'buy the dip' mentality.
Above: GBPUSD at daily intervals.
"Sterling fell on Wednesday, retreating further from its April 28 high of 1.3445, but a reversion to gains remains possible for GBP/USD as the dollar selloff tied to tariff concerns appears largely intact — albeit paused — as markets await clarity on U.S. trade policy," says Paul Spirgel, a Reuters market analyst.
He explains that with tariff risk still elevated, further dollar weakness seems likely. "The recent dollar bounce may be temporary position adjustment as markets await further developments."
The British Pound has risen 3.20% against the Dollar in April, adding to March's 2.70% gain, boosted by a significant repraisal in the U.S. economy's growth prospects under a punitive tariff regime.
Policy uncertainty and President Donald Trump's disruptive reordering of the global political order have prompted international investors to reduce exposure to U.S. assets, including the Dollar.
"There has been a sharp stop of foreign investor inflow into U.S. bond and equity markets over the last two months. Our broad takeaway is that the flow evidence so far points to an, at best, very rapid slowing in US capital inflows and, at worst, continued active disinvestment from US assets. Either interpretation poses a challenge to the USD as a twin deficit currency," says George Saravelos, Global Head of FX Research at Deutsche Bank.
He warns that a buyers strike of U.S. assets is set to harm the Dollar further. "What matters for the USD is what foreign investors are doing and, so far, based on his analysis the evidence is that they remain on a buyers' strike on US assets."