GBP/USD extends recovery amid US Dollar softness and modest UK GDP growth

• GBP/USD extends its recovery for a second straight day as the US Dollar stays under pressure.
• UK GDP grows 0.1% in August, showing modest momentum after July's downward revision.
• BoE policymaker Catherine Mann warns inflation remains persistent, despite signs of a softer labour market.

The British Pound (GBP) strengthens against the US Dollar (USD) on Thursday, extending gains for the second day in a row. At the time of writing, GBP/USD is trading around 1.3431, rebounding after briefly falling to a two-and-a-half-month low on Tuesday.

The recovery in Sterling comes as the Greenback softens amid escalating US-China trade tensions and prolonged uncertainty surrounding the United States (US) government shutdown, now in its third week. Traders are also fully pricing in back-to-back 25-basis-point interest rate cuts by the Federal Reserve (Fed) at the upcoming October and December meetings.

Fresh UK economic data provided support to the Pound. The Office for National Statistics (ONS) reported that Gross Domestic Product (GDP) grew by 0.1% in August, while the economy expanded 0.3% over the three months to August. The slight improvement offers some relief after July's downward revision and suggests that Britain may narrowly avoid a contraction in the third quarter.

In addition, Bank of England (BoE) policymaker Catherine Mann said on Thursday that headline inflation has continued to rise and that there is evidence of persistence in price pressures. She added that the labour market has loosened but is not falling off a cliff, and noted that the Pound appreciation can help ease inflation pressure. Mann also warned that inflation expectations have drifted away from levels consistent with the BoE's target, suggesting the central bank must remain cautious.

On Thursday, UK Chancellor Rachel Reeves said that inflation is still too high and that the government is looking into regulated prices to help reduce cost pressures. Reeves confirmed that the government will not introduce a new wealth tax, explaining that high earners already pay significant taxes. She also said she wants to build a larger fiscal buffer to protect the economy from volatility, though she admitted that achieving this will require trade-offs between taxes and spending.