Sterling is trading slightly higher against the US dollar in early Asian trade on Friday, hovering just below the 1.3500 level with a daily range of roughly 20 pips. The market has shown a muted reaction to the dual boost of stronger-than-expected UK economic growth and softer US producer price data.

June GDP rose by 0.3% month-on-month, a surprise that on the surface looks positive. However, a closer look reveals that this "surprise" was heavily dependent on one-off factors like a temporary truce in the Gulf, the start of the World Cup, and favourable weather. The ceasefire agreement, a key contributor, had already collapsed in July, significantly undermining the quality of this growth.

Meanwhile, the US dollar is weakening on the back of fading rate hike expectations, but sterling's cross rates are under broad pressure. This suggests that the current rally is driven more by US dollar selling than by active buying of the pound.

Growth beat is a "good data" built on a dead ceasefire UK GDP grew 0.3% month-on-month in June, far exceeding the forecast of 0% growth. The annual rate for the second quarter came in at 1.2% (vs. 1.1% expected), while the quarterly rate was in line at 0.4%, though slowing from 0.6% in the previous quarter. All the upside surprise was concentrated in June alone.

The breakdown shows the services sector was the main driver of June's growth, with contributions stemming from three factors: the temporary truce in the Gulf, the start of the World Cup, and favourable weather. Two of these are non-repeatable calendar events, while the third, the ceasefire, has already broken down in July.

Negotiations to reopen the Strait of Hormuz are at a standstill, with Iran laying out six preconditions and the US claiming the waterway is already under its control. Only eight oil tankers transited on Tuesday, a far cry from the pre-war daily average of around 130. Growth fuelled by service-sector consumption during a ceasefire provides a fragile foundation for supporting the pound.

On the industrial side, data points are weakening across the board. Industrial production fell 0.2% month-on-month in June, against expectations of a slight rise, while manufacturing output dropped 0.5% (vs. a forecast 0.2% decline).

Weakening dollar driving the pair, sterling crosses reveal true position US July PPI was flat month-on-month (vs. +0.2% expected), with the annual rate falling to 4.7% from 5.5%. The core PPI rose 0.2% month-on-month (vs. 0.3% expected). Initial jobless claims rose to 209,000 (vs. 202,000 expected, from 200,000 prior).

Interest rate futures now show the probability of a Fed rate hike in September has dropped to 34.8% from a "50-50" chance on August 10, with the probability of holding rates rising to 65.2%. The October meeting is nearly a 50-50 split, while the probability of the Fed holding the current rate range through December is 34.1%. No rate cuts are priced in for any 2026 meeting. This reflects a repricing of rate hike expectations, not the start of an easing cycle.

Two Fed officials gave hawkish speeches, including one of the three regional bank presidents who voted against the July decision, but this did not prevent the market from repricing.

Next week brings the first "real UK week" of the summer Friday's focus is on US July retail sales (expected +0.1% month-on-month vs. +0.2% prior) and the University of Michigan consumer sentiment index preliminary (expected 54.5 vs. 55.2 prior), with the inflation expectations sub-component more closely watched than the headline.

Next week, the spotlight returns to the UK: August 18: Labour market data (jobless claims, employment change, and unemployment rate, prior 4.9%). August 19: July inflation data (prior headline 2.6%, core 2.6%), coinciding with the release of the Fed FOMC minutes. August 21: Retail sales and August PMI flash data. These releases will be the last set of key domestic readings before the Bank of England's September 17 meeting, where three of the nine MPC members are already leaning towards a rate hike. The FOMC minutes on August 19, dropping on the same day as UK inflation data, will make the middle of next week the first "bilateral test" of this rally.

Summary In summary, sterling's rally from just below 1.3400 has gained roughly 2 cents, but the driving force is a repricing of US rate expectations, not a strengthening of UK fundamentals. While June GDP beat expectations, the contributions were largely one-off events, and a key support (the ceasefire) has already vanished, with industrial output showing signs of weakness.

Next week's dense slate of UK employment, inflation, and PMI data, combined with the simultaneous release of the FOMC minutes, will be the critical window to test whether sterling can hold its ground above 1.3500.