UK Growth Reforms Boost Sterling
Sterling Rises as UK Unveils Growth Reforms and New Investment Plans
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Key Points
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Strategists at Brown Brothers Harriman expect U.K. July GDP to be flat month on month, compared with 0.3% growth in June, as weaker retail-sales volumes offset an improvement in the composite PMI. They said the Bank of England’s baseline forecast for third-quarter growth is 0.1% quarter on quarter.
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The latest eurozone figures showed second-quarter GDP growth of 0.6%, up from the preliminary 0.4% estimate, while German industrial production fell 1.1% month on month in July, sharply missing expectations for a 0.1% increase.
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Healey said in a speech in Coventry that the U.K. economy was “turning a corner,” citing six interest-rate cuts since the 2024 election and a stock market that had reached record highs, while also warning about the state of the public finances ahead of the Oct. 28 budget.
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The strong U.S. employment report included an upward revision to July payroll growth, from an initially reported decline of 23,000 to an increase of 21,000. Commerzbank said futures markets raised the probability of a 25-basis-point Federal Reserve hike on Sept. 16 to 62%, from 51% before the report.
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The British Business Bank’s £150 million northern England fund is expected to make individual investments of between £5 million and £15 million in fast-growing companies.
Sterling rose against the dollar and euro on Friday as markets welcomed U.K. Chancellor John Healey's growth reforms. Healey announced plans to cut business red tape by 25%, devolve power to city regions, and invest £150 million in fast-growing northern England firms. FXStreet reported the pound edged higher, though gains were modest as investors weighed mixed U.S. jobs data and uncertainty over Federal Reserve rate decisions.
The pound's strength was tempered by conflicting signals from American employment numbers. U.S. payrolls grew more than expected in July, with Commerzbank analysis showing futures markets raised the odds of a September Fed rate hike to 62%, up from 51% before the report. U.K. July GDP data and U.S. inflation figures loom as the next market-moving releases. Brown Brothers Harriman expects British GDP to flatline month on month, down from 0.3% growth in June.
Healey's Growth Plan Bolsters Pound on Reform Hopes
Chancellor Healey told a Coventry audience that the U.K. economy was "turning a corner." He pointed to six interest-rate cuts since Labour's 2024 election win and stock markets at record highs. Healey vowed fiscal discipline ahead of the October 28 budget, signaling London will balance growth ambitions with debt concerns. The £150 million northern fund targets fast-growing companies with individual investments between £5 million and £15 million.
U.S. Payrolls Fuel Rate-Hike Bets, Clouding Rate Outlook
American jobs data surprised to the upside, forcing traders to reassess Fed intentions. The July payroll count was revised up from a 23,000 decline to a 21,000 gain—a swing of 44,000 jobs. Commerzbank flagged that futures markets now price a 62% chance of a 25-basis-point rate hike on September 16, versus 51% beforehand. The shift adds volatility to currency markets and dims near-term pound strength.
UK Growth Expected Flat as Eurozone Data Brightens
Brown Brothers Harriman predicts U.K. July GDP will be flat month on month, down from June's 0.3% gain, as weak retail sales offset manufacturing strength. The Bank of England's forecast pegs third-quarter growth at just 0.1% quarter on quarter. Meanwhile, eurozone second-quarter GDP was revised upward to 0.6%, from an initial 0.4% estimate. German factory output fell 1.1% month on month in July, missing economist calls for a 0.1% rise. That weakness supported sterling versus the euro.
U.K. rate decisions hinge on inflation data rather than growth alone. Upcoming U.S. PPI and CPI releases will guide Fed expectations, while U.K. GDP figures carry lower weight for Bank of England policy. Markets now await clarity on whether U.S. and U.K. rate paths will diverge, a key driver of sterling valuations ahead of autumn policy meetings.
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