Better than expected UK economy lifts pound

LONDON • The pound strengthened, reversing an earlier decline against the dollar, after data showed the UK economy expanded more than forecast in the third quarter, reinforcing expectations that the Bank of England (BoE) will raise interest rates next week.

The pound climbed versus all of its major peers, while government bonds fell after the UK’s statistics office said that gross domestic product rose 0.4% from three months earlier, beating the median forecast for 0.3% growth in a Bloomberg survey.

Separately, Brexit Secretary David Davis told lawmakers that the UK wants to agree on the form of transition period for a separation from the European Union by December or soon after.

A November rate hike is “pretty much a sure thing now”, said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd.

“But the pound reaction is limited, probably because we are likely to see a dovish hike from the BoE.”

Market expectations of a rate increase have climbed over the past month as both comments from policymakers and data have been seen boosting the case to tighten policy, with the latest data seen reinforcing this view.

The pound continued to climb as Davis said in testimony to lawmakers that he thought the chance of the UK leaving the EU with no deal at all was very unlikely.

The pound rose 0.6% to US$1.3218 (RM5.59) as of 11:04am in London yesterday, after dropping earlier to US$1.3110. It strengthened 0.6% to 89.03 pence per euro.

The yield on two-year gilts climbed four basis points to 0.51%, the highest level since June 2016.

Benchmark 10-year gilt yields increased four basis points to 1.4%. Investors in the money markets are now pricing an 86% probability that the BoE will raise rates on Nov 2, up from 82% on Tuesday. — Bloomberg