Sterling hits highest in over a week vs dollar, monetary policy in focus

By Stefano Rebaudo

(Reuters) -Sterling climbed on Thursday to its highest level in more than a week against the dollar, as expectations for a more dovish Federal Reserve outweighed concerns about the UK economy and next month’s budget.

Meanwhile, growing optimism in France that Prime Minister Sebastien Lecornu could survive a no-confidence vote helped lift the euro, putting it on track for a second straight gain against the pound.

The British currency barely moved after data showed that the economy grew by 0.1% in August after dipping by 0.1% in July.

Sterling <GBP=D3> was up 0.3% versus the greenback at $1.3438, after hitting $1.3443, its highest since October 7.

US DOLLAR ON TRACK FOR ANOTHER LOSS

The U.S. dollar was on track for a third straight daily loss against the euro while edging up versus the yen on Thursday, as concerns over U.S.-China tensions and dovish remarks from Federal Reserve officials continued to weigh on sentiment.

The euro posted strong gains earlier this week as investors began positioning for a potentially earlier-than-expected rate cut by the Bank of England, while two-year gilt yields dropped sharply.

The single currency dropped 0.18% to 86.73 pence.

Short-dated UK government bond yields held steady around 3.88% on Thursday, after falling more than 15 basis points earlier in the week.

The move followed data showing a slowdown in wage growth, a key metric the Bank of England is watching as it weighs the timing of its next rate cut.

Bank of England policymaker Alan Taylor said on Tuesday that he saw an increasingly likely risk of a "bumpy landing" for Britain's economy with inflation falling too low. 

Economists, however, remain sceptical about a BoE rate cut this year.

"Despite persistent growth concerns, still-elevated earnings growth and the prospect of headline inflation rising to 4% in September are likely to rule out a further interest rate cut this year," said Raj Badiani, economics director at S&P Global Market Intelligence.

"The first rate cut is expected to occur in February 2026 and the Bank rate to stand at 3.25% at the end of next year," he added. 

Traders are pricing in a 44% chance of a 25 basis-point rate cut by the Bank of England in December, with full expectations for easing by March 2026. Markets also see cumulative cuts totalling 53 basis points by the end of 2026.

(Reporting by Stefano Rebaudo; editing by Ed Osmond)