Following weak UK labor market data, equally soft figures on British economic growth were released on Thursday. Almost all components of the report came out in the "red zone," increasing the likelihood of the Bank of England cutting rates at one of its upcoming meetings.

Yet despite the release's "red tone," the pound is holding firm against the dollar: It approached the 1.36 area and even tested the resistance level of 1.3610. Meanwhile, in other cross pairs, the pound is under significant pressure after the publication (note the dynamics of crosses like GBP/JPY and EUR/JPY).

All of this suggests that the bullish dynamics of the GBP/USD pair are primarily driven by dollar weakness. This is a key point—if the dollar regains situational demand, the pound may struggle to maintain its upward momentum. Under the current circumstances, this currency pair's growth primarily depends on the U.S. dollar's decline.

But we'll return to the dollar shortly. For now, let's analyze the report on UK economic growth. This release will soon resurface—literally next week, during the June meeting of the Bank of England.

According to the published data, UK GDP in April shrank by 0.3% month-on-month. This is the lowest value since November 2023 (the forecast was 0.1%). On a quarterly basis, the figure remained at the previous month's level (0.7%). Year-over-year, the British economy grew by 0.9%—the lowest since July 2024. This component has been declining for two consecutive months.

Other components of the release were also mostly disappointing. Industrial production dropped by 0.6% m/m (after a 0.7% decline in the previous month) and by 0.3% y/y (vs. forecasts of -0.4% and -0.2%, respectively). Manufacturing output fell sharply by 0.9% month-on-month.

Let me remind you that earlier this week, data showed UK unemployment rose to 4.6%, the highest since July 2021 (an upward trend recorded for the second month in a row). Jobless claims increased by 33,000— the highest reading since August last year. The figure tripled the forecasted value (9.2k). Additionally, wage growth slowed to 5.3% (including bonuses) and 5.2% (excluding bonuses) in May. The three-month annualized figure dropped to 3.0%. Meanwhile, UK CPI in April accelerated—headline (3.5% y/y) and core (3.8% y/y).

So, on one hand, we have an economic slowdown and labor market cooling, and on the other, accelerating inflation. This is a very unpleasant combination for any central bank, and the BoE is no exception. Nevertheless, I believe the central bank will take a dovish stance at the upcoming meeting on June 19 and will likely announce another rate cut.

Firstly, BoE Governor Andrew Bailey, speaking in early June before members of the lower house of Parliament, said that the pace of future rate cuts would depend on wage growth. He stated that "this factor will be crucial in future rate decisions." Wage growth has slowed (more than expected), so the BoE cannot ignore this, especially amid a weakening national economy.

Secondly, April's inflation spike was partly due to the introduction of the Vehicle Excise Duty that month—a tax included in the consumer basket.

According to consensus forecasts, the BoE will keep rates unchanged in June—there is no doubt about that. The intrigue lies in the future pace of monetary easing. In my opinion, the balance has now tilted toward two rate cuts before year-end: one in August (or September) and another at one of the three remaining meetings.

The current fundamental picture is negative for the pound and does not support GBP/USD growth. Nevertheless, the pair rose impulsively on Thursday and has updated a three-year high at 1.3622. This price action is driven by broad-based dollar weakness amid mounting stagflation risks in the U.S. Dollar bulls were disappointed by the terms of the announced trade deal with China. These terms maintain the current level of tariffs on Chinese goods—totaling 55% (including those introduced during Trump's first presidency).

Moreover, the White House is preparing for a new round of trade war escalation. According to the U.S. president, Washington will soon send its trading partners "letters of happiness" with two items: tariff levels after the grace period ends (i.e., from July 10) and the terms of the proposed deal. These will be ultimatums: "Agree to the deal, or see item No. 1."

In response to such one-sided news—exacerbated by rising CPI alongside falling ISM indices—the U.S. Dollar Index hit a three-year low on Thursday, plunging to 97.6. A weak pound has proven stronger than a weak greenback.

It's also worth noting that GBP/USD buyers failed to decisively break above the 1.3610 resistance level, corresponding to the upper line of the Bollinger Bands on the H4 chart. Therefore, it's too early to rush into long positions—the 1.36 level may prove too tough for bulls (especially given the weak pound). Long positions will become relevant only once traders consolidate above 1.3610, opening the way to the next targets: 1.3650 (upper Bollinger Band on D1) and 1.3700.