Sterling Hits Six-Week High Against the Euro as UK GDP Growth Is Revised Upward

Sterling climbed to a six-week high against the euro on Wednesday after official figures showed the British economy grew faster than previously estimated in the second quarter, cementing expectations that the Bank of England will raise interest rates before the end of the year, according to Reuters.

The Office for National Statistics said UK output expanded by 0.5% in the April-to-June period, an upward revision from the initial 0.4% estimate. Economists polled by Reuters had expected the reading to remain unchanged.

The pound rose 0.4% to $1.3292, a one-week high against the dollar, while against the euro it reached its strongest level since mid-August, with the single currency falling to around 85.4 pence, Reuters reported. The rebound offered some relief for the currency, which remains set for its biggest monthly loss in nearly a year after broad dollar strength wiped out its quarterly gains.

Money markets are now pricing in around 33 basis points of Bank of England tightening by year-end, LSEG data showed, with traders assigning an 81% chance of a 25-basis-point increase at the central bank’s November meeting, according to the Wall Street Journal.

The pound also drew support from Prime Minister Andy Burnham’s pledge of fiscal discipline at Labour’s annual conference on Tuesday, alongside his promise to improve ties with the European Union, and from dovish comments by US Federal Reserve policymaker John Williams, who said there was “no need for urgency” in raising US rates. August US inflation data also came in below forecasts, denting the dollar.

Nicolas Trindade, a senior portfolio manager at BNP Paribas Asset Management, cautioned that markets looked “overly hawkish”, noting the Bank of England could stay on hold if the outlook changes by November.

Sources

• Sterling at strongest in over a month versus euro after GDP revision reinforces BoE hike bets — Reuters — Read on Reuters
• Sterling Rises on Strong U.K. Data, Prospect of Fiscal Discipline and Improved EU-U.K. Ties — The Wall Street Journal — Read on The Wall Street Journal