Sterling strengthens as UK GDP revision lifts Bank of England rate expectations

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Sterling lifts on UK GDP

Highlights

UK GDP revised up to 0.5% growth for April-June, beating expectations and pushing sterling 0.4% higher to $1.3292 and the euro to 85.43 pence.
LSEG data show traders pricing in 33 basis points of Bank of England tightening by year-end and more than 100 basis points by 2027, diverging from broader analyst expectations.
Despite a sterling rebound, broad dollar strength leaves the pound set for its worst monthly loss in nearly a year and a flat quarter, while outperforming the euro.

GDP revision boosts rate outlook

As reported by Reuters, UK economic output expands by 0.5% in the April-to-June period, slightly above the initial 0.4% estimate and ahead of expectations for no revision. The data helps lift sterling 0.4% to $1.3292, a one-week high, while the euro falls nearly 0.3% to 85.43 pence, leaving the pound at its strongest level against the single currency since mid-August.

LSEG data show traders are pricing in about 33 basis points of Bank of England tightening by year-end and more than 100 basis points by the end of 2027, even as analysts broadly expect a more limited policy response. Nicolas Trindade, senior fixed income portfolio manager at BNP Paribas Asset Management, says markets appear overly hawkish and that the BoE could stay on hold if conditions are resolved by November, but may feel pressure to raise rates if they are not.

Dollar moves and policy divergence shape quarter-end trading

Comments from U.S. Federal Reserve policymaker John Williams also support sterling against the dollar after he says there is no need for urgency in raising rates. CME Group's FedWatch Tool shows markets shifting in favor of a December rate increase rather than an October move.

Despite the latest rebound, broader dollar strength has weighed on sterling this month and erased its gains for the quarter, leaving the currency on track for its biggest monthly loss in nearly a year and a flat finish to the third quarter. Against the euro, however, sterling is set for small monthly and quarterly gains as investors price in relatively more dovish European Central Bank policy than the BoE, while UK markets also head into a pivotal month as Prime Minister Andy Burnham's government prepares to unveil a budget.

In our earlier article on the upward revision to UK second-quarter GDP growth, we noted the economy expanded by 0.5% in the three months to June, above the initial 0.4% estimate. We explained that stronger services output and a firmer business investment figure helped paint a more resilient picture of the economy ahead of Prime Minister Andy Burnham’s upcoming Budget.

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