British Pound drifts away from 1.3500 as weak UK Industrial Production offsets bright GDP data

• GBP/USD is trading within a narrow range below 1.3500 after rejection at 1.3546 on Wednesday.
• UK GDP figures beat expectations in Q2 but Industrial Production data disappointed.
• US Dollar rallies remain limited as CPI data contributed to cool hopes of immediate Fed rate hikes.

The British Pound (GBP) treads water against the US Dollar (USD), trading practically flat, a few pips below the 1.3500 level on Thursday's early London session. The bright UK second quarter Gross Domestic Product (GDP) release has been offset by downbeat factory output figures, while the US Dollar keeps wavering within range, as Federal Reserve (Fed) monetary tightening expectations shrink.

Data released by the UK National Statistics Office revealed that the country's economy grew at a steady 0.6% pace in the second quarter, unchanged from Q1, beating market expectations of a slowdown to 0.4%. The monthly GDP has shown an unexpected acceleration to 0.3% in June, from a downwardly revised 0% reading in May.

Factory activity data, however, has curbed investors' optimism, highlighting the negative impact of the high energy prices stemming from the Middle East conflict. Industrial Production contracted 0.2% in June, against expectations of a 0.1% growth, and May's reading was revised to a 0.7% fall, from the previous -0.5% reading. Likewise, Manufacturing production shrank at a 0.5% pace, exceeding the 0.2% drop anticipated by the market and following a 0.2% decline in May, also revised down from the 0.1% growth previously estimated.

The US Dollar stalls as inflation pressures ease

The US Dollar remains capped. The stalled peace process in the Middle East keeps providing some support, although recent macroeconomic data has been less favourable. July's Consumer Price Index (CPI) figures showed some moderation of inflationary pressures on Wednesday, which, coupled with the downbeat Nonfarm Payrolls report seen last week, has prompted investors to scale back Fed rate hike bets for September. Futures markets are now pricing a 40% chance of a quarter-point rate hike next month, down from 54% last week, according to the CME Group's FedWartch Tool.

Strategists at Scotiabank observe that recent Pound moves remain largely sentiment-driven, with GBP showing a tight correlation to risk reversals, and add that "yield spreads are also looking slightly more constructive for the Pound, showing signs of a renewed recovery following their modest mid/late July pullback."

From a technical perspective, Scotiabank flags "potential for additional near-term resistance closer to 1.3600 and the May peaks in the mid-1.36s," while "support in the mid/lower 1.34s" underpins the downside. Overall, they "look to a near-term range-bound between 1.3450 and 1.3550" as markets await the upcoming UK releases.