LONDON (Reuters) - Sterling surged to its highest in over a week versus the dollar on Wednesday after data showed the British economy picking up speed, bolstering expectations that the Bank of England will raise interest rates next week.
Data on Britain’s quarterly gross domestic product growth showed the economy expanding at a faster pace than expected, unseating some of the earlier uncertainty around the likelihood of a rate hike after BoE policymakers next meet, on Nov. 2.
GDP growth rose to 0.4 percent in the third quarter from 0.3 percent in the second and beat the expectations of most economists for 0.3 percent growth, a performance Chancellor Philip Hammond described as “solid”.
This pushed sterling up by over a full percentage point on the day, surging to an 8-day high of $1.3271 GBP=D3, before easing slightly down to $1.3255 by 1550 GMT.
Against the euro, sterling strengthened to as much as 88.80 pence EURGBP=D3, also up over half a percent.
“Sterling’s advance today... looks to be squarely based on the GDP data, which came in as somewhat of a surprise on the upside,” said Neil Jones, head of hedge fund FX sales at Mizuho in London.
“It pretty much puts paid to the chances of a rate hike. It’s somewhat of a certainty now,” he added.
As the GDP data fanned expectations for faster rate rises from the Bank, five-year government bond yields GB5YT=RR rose to their highest level since last year’s vote to leave the European Union.
However, questions remain over the longer-term picture for the British economy. Lower rates of productivity, squeezed household incomes and continued uncertainty dampened chances of an extended period of interest rate hikes, some analysts said.
“It’s unlikely that this would mark the beginning of a series of rate hikes,” said Hamish Muress, currency analyst at OFX.
“Instead, it should signal a move out of ‘emergency mode’ for the Bank of England, providing the Bank with the ability to lower rates once again, should the economy need a boost around the Brexit deadline in 2019.”
Concerns about the progress of talks on Britain’s departure from the European Union continue to weigh on the pound, with businesses and investors keen to see a framework in place soon for the two-year transitional period after Britain formally leaves in March 2019.
Brexit minister David Davis said on Wednesday that Britain wants an outline agreement with the EU on the transitional arrangements by the first quarter of 2018.
Prime Minister Theresa May expects a Brexit deal to be agreed in enough time for MPs to vote on it before March 2019, her spokeswoman said.
Reporting by Polina Ivanova and Jemima Kelly; editing by John Stonestreet and David Evans