Sterling extended its advance on Wednesday after stronger UK GDP data landed on top of a Bank of England repricing already underway. GBP/USD rose 0.31% to $1.3271. Markets pushed November hike odds to 89.2%.
Sterling's Rally Began Before the GDP Beat
The pound's broadest gains of the week trace back to central bank signaling, not Wednesday's growth data. Bank of England Governor Andrew Bailey first flagged the difficulty of holding policy unchanged if persistently high energy prices keep lifting inflation pressure. Deputy Governor Dave Ramsden then went further on Monday, explicitly leaving open the case for another hike.
EUR/USD gained 0.11% to $1.1354, a smaller move than sterling's. Markets now assign an 89.2% probability to a November rate hike, with the implied post-meeting rate near 3.97% against the current 3.75%. The curve extends further still, pricing roughly 1.5 cumulative hikes by December and an implied terminal rate near 4.86%.
GDP Confirms Resilience, but Trade Did the Heavy Lifting
Britain's economy grew 0.5% in Q2, beating a 0.4% forecast, led by services and exports, the Office for National Statistics said. Export volumes rose 2.8%, sharply revised from an initial 0.5% estimate. Household consumption increased only 0.3%, making the beat supportive rather than a picture of broad domestic demand.
Real household disposable income per head rose 1.0% quarter-on-quarter, the strongest increase since late 2024. Yet the saving ratio rose from 8.6% to 8.8%, suggesting households kept a cautious stance even as incomes improved.
Rising Borrowing Puts Weight on the October Budget
Government borrowing rose to 5.2% of GDP from 4.2%, raising the stakes for the October 28 Budget. The same energy-driven inflation shock pushing the Bank of England toward more hikes is also the one that could weaken demand and squeeze fiscal policy later.
Meanwhile, the dollar's rally paused ahead of U.S. inflation and jobs data. According to ING FX strategist Francesco Pesole: "Rising back-end yields continue to weigh on global risk sentiment." Sterling's gain was nearly triple the euro's on the day, though the pair remains well below its 52-week high of 1.3869.
Sources: ActionForex, Forex News
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