Sterling edges up, gains tempered by soft UK growth data

By Amanda Cooper

LONDON (Reuters) -The pound rose on Thursday, as a deal in Washington to reopen the U.S. government after the longest shutdown on record drew investors to more volatile assets, though gains were tempered by data showing the UK economy barely grew in the third quarter.

The British economy grew 0.1% in the third quarter of 2025, the Office for National Statistics said, slowing from growth of 0.3% in the second quarter. 

The data underlined the backdrop of slow growth against which finance minister Rachel Reeves is preparing her November 26 budget, which is widely expected to contain a raft of tax hikes. 

The pound was last up 0.2% on the day at $1.3158, having earlier traded at a session low of $1.3102.

Traders are attaching a near-80% chance of a December rate cut from the Bank of England, which refrained from cutting rates at its November meeting, given the uncertainty over the outlook for inflation and growth, particularly in the run-up to Reeves' budget.

They expect at least two more rate cuts next year, with a decent chance of a third, according to money market derivatives. 

Adding an extra possible drag on the pound is political turbulence in London, where Prime Minister Keir Starmer faces division within his ruling Labour Party and tumbling poll ratings.

"We expect the pound to weaken further if the market moves to price in a higher political risk premium," Lee Hardman, currency strategist at MUFG, said, adding that local elections next May could provide a key test of his leadership.

More immediately, markets are looking to Reeves' belt-tightening budget in two weeks.        

A rise in implied volatility on options expiring in two weeks' time reflected growing trader demand for hedges against large swings in the value of sterling on the day of the budget, with vol rising to 6.83%, from 6.358% a week ago.

(Reporting by Amanda Cooper; Editing by Andrew Heavens)