UK pound gains as July growth tops forecasts

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UK pound gains on strong July growth

Highlights

Britain's GDP grows 0.4% in July, beating forecasts for no growth, with services sector expanding 0.4% and sterling rising 0.1% to $1.352.
UK 10-year gilt yield climbs to nearly 5.4%, highest since 2007, and the 30-year yield approaches 6%, driven by energy-linked inflation fears.
Traders nearly fully price in a November Bank of England rate hike and expect three more by mid-2027 amid persistent energy cost and inflation risks.

July GDP surprise lifts sterling

As reported by Reuters, citing the Office for National Statistics, Britain's gross domestic product grows 0.4% in July, well above economists' forecasts for no growth. The services sector drives the increase, expanding 0.4% month on month, while sterling rises 0.1% to $1.352 and gains by a similar margin against the euro, which falls 0.1% to 85.84 pence.

Britain's economy expands 1% in the first half of the year, the fastest growth in the G7. Some economists, however, say seasonal adjustment issues could mean the figure is overstated, even as the pace puts the economy on track to exceed the Bank of England's 1.1% growth forecast for 2026 if the data are not revised lower.

Sanjay Raja, chief UK economist at Deutsche Bank, says investment in AI is helping support sectors including telecoms and information services. He says households and businesses are still spending despite the unfolding energy shock weighing on disposable incomes.

Energy risks shape rate expectations

Britain's economy fares better than expected even as rising energy costs linked to the Iran war continue to threaten growth. Brent crude oil rises to $110 a barrel for the first time since May, reinforcing concerns that inflation pressures could intensify again.

Higher energy costs push traders to increase bets on further interest-rate rises and help send global bond yields to multi-year or multi-decade highs. Britain's benchmark 10-year gilt yield rises to its highest level since 2007 at near 5.4%, while the 30-year yield reaches almost 6%, its highest since 1998.

Economists expect the Bank of England to keep interest rates unchanged at 3.75% at next week's meeting. Even so, traders are almost fully pricing in a hike in November and expect roughly three more increases by the middle of 2027, although Governor Andrew Bailey says this market pricing includes a risk premium tied to fears of further energy price increases.

In our earlier coverage of the UK’s stronger-than-expected July GDP reading, we highlighted that monthly output rose 0.4%, reinforcing signs of comparatively resilient growth among major advanced economies. We also noted that while first-half expansion led the G7, some analysts flagged possible seasonal-adjustment distortions, and attention was turning to the Bank of England’s 2026 growth outlook and inflation risks as higher oil prices raised pressure on borrowing costs.

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