Market News

Summary

• UK Q2 growth revised up, lifting sterling
• Markets price in 33 basis points of Bank of England hikes by year-end
• Pound set for monthly losses against the dollar
• Prime Minister Andy Burnham’s first budget to be a key market driver in October

LONDON, Sept. 30 (Reuters) — Sterling hit a six-week high against the euro on Wednesday after data showed the UK economy grew faster than previously expected in the second quarter, reinforcing expectations of an interest rate hike by the Bank of England by the end of this year.

The pound rose 0.4% to a one-week high of $1.3292, recovering from a three-month low reached in the previous session. Against the euro, sterling was at its highest level since mid-August, with the euro down nearly 0.3% at 85.43 pence.

Economic output expanded by 0.5% in the April-to-June period, slightly higher than the initial estimate of 0.4%. Economists polled by Reuters had expected the previous estimate to remain unchanged.

Traders are pricing in around 33 basis points of monetary tightening from the BoE by year-end and more than 100 basis points by the end of 2027, according to LSEG-compiled data, although analysts broadly expect much more limited action.

“You can see here very clearly a market that is overly hawkish. If we get a resolution by November, the BoE may decide to stay on hold, but if it doesn't happen, then they'll be pushed to hike because the ECB has hiked, the Fed has hiked, the BOJ has hiked and they may feel a bit of pressure to do it,” said Nicolas Trindade, a senior fixed income portfolio manager at BNP Paribas Asset Management.

Also supporting the pound against the dollar were comments from prominent U.S. Federal Reserve policymaker John Williams, who said there was “no need for urgency” in raising rates. This prompted markets to lean in favour of a rate hike in December rather than October, according to the CME Group’s FedWatch Tool.

Dollar strength has weighed on the pound this month and erased its gains for the quarter. Sterling is on course for its biggest monthly loss in nearly a year and is set for a flat end to the third quarter.

Against the euro, however, sterling was on course for small gains on both a monthly and quarterly basis, mainly driven by euro weakness as investors priced in relatively dovish European Central Bank policy compared with the BoE. The ECB is expected to raise rates by roughly 90 basis points by year-end, according to LSEG data.

UK markets are also heading towards a pivotal month, when Prime Minister Andy Burnham’s new government is expected to unveil its budget.

On Tuesday, Burnham said Britain should consider options for its future relationship with the European Union, including ultimately rejoining the bloc. Britain is still grappling with the economic and political consequences of the vote to leave the EU a decade ago.

Reporting by Johann M Cherian in Bengaluru; Editing by Toby Chopra