Sterling at strongest in over a month versus euro after GDP revision reinforces BoE hike bets

Sterling Surges to 6-Week High Against Euro Following Positive UK GDP Data

Market Reactions to UK Economic Growth and Central Bank Policy

By Johann M Cherian

Sterling's Performance Against Major Currencies

20 Sept (Reuters) - Sterling hit a 6-week high versus the euro on Wednesday after data showed the UK economy grew faster than previously expected in the second quarter, cementing expectations for an interest rate hike by the Bank of England by the end of this year.

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

UK GDP Growth Exceeds Expectations

Economic output expanded by 0.5% in the April-to-June period, a touch higher than the initial estimate of 0.4%. Economists polled by Reuters anticipated no change from the previous estimate.        

Bank of England Rate Hike Expectations

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, LSEG-compiled data showed, although analysts broadly expect much more limited action.

Market Sentiment and Analyst Commentary

"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.

Influence of Global Central Banks and Dollar Strength

Also helping the pound gain on the dollar were comments from prominent US 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 over October, the CME Group's FedWatch Tool showed.

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

Sterling vs Euro: Relative Central Bank Policies

However, against the euro it was set for small gains on both the monthly and quarterly basis, primarily driven by euro weakness as investors priced in relatively dovish European Central Bank policy versus the BoE. The former is expected to hike rates by roughly 90 bps by year-end, LSEG data showed.

Political Developments and Future Outlook

UK markets are also heading towards a pivotal month where Prime Minister Andy Burnham's new government will unveil a budget.

On Tuesday, Burnham said the country 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)