The British pound climbed to $1.342 on Friday, its highest level against the U.S. dollar since early 2022, after the Office for National Statistics reported first-quarter UK GDP growth of 0.7% quarter-over-quarter. The figure dramatically exceeded the 0.3% Bloomberg consensus and the Bank of England's February forecast of 0.2%, marking the strongest quarterly print since Q2 2023.
The robust release prompted markets to remove much of the priced-in Bank of England easing for the remainder of 2026. Overnight indexed swaps now imply only one further 25-basis-point cut before year-end, down from two cuts priced in earlier this week. The 10-year UK gilt yield rose 9 basis points to 4.32%, the largest single-day move in three months.
Services Drive the Surprise
Services output rose 0.9% on the quarter, the strongest contribution since 2021, supported by a 4.1% surge in legal and accounting services tied to a wave of corporate restructurings around the Iran-conflict period. Financial services activity grew 1.6%, benefiting from elevated trading volumes during the volatile February-March stretch. Information and communication output expanded 1.2%, reflecting continued strength in fintech and AI services.
The manufacturing sector returned to growth at 0.4% after three consecutive quarterly contractions, helped by a 12% jump in defense-equipment production tied to UK government spending on Ukraine support and Iran-related rearmament. Construction also contributed 0.3% to overall growth as housing starts began to recover from rate-induced lows.
FTSE 100 Reaches Record 9,012
The FTSE 100 closed at a record 9,012 on Friday, up 0.8% on the session and 6.4% year-to-date. UK domestic stocks have been particularly strong, with the FTSE 250 mid-cap index up 12.3% year-to-date as investors increased exposure to UK domestic-economic plays. Banking shares including Lloyds, Barclays, and NatWest gained between 2.1% and 3.4% on the session.
Chancellor Rachel Reeves welcomed the data, noting it validates the Labour government's "growth-first" budget unveiled in November. However, ONS officials cautioned that the strong quarterly figure may overstate underlying momentum due to defense-driven distortions. Independent forecasters at the OBR continue to project full-year 2026 GDP growth of 1.6%, well below the implied 2.8% annualized rate from the Q1 data.