Sterling Steadies Against Dollar as U.S. Growth Hits 3.4% and Bets Build on UK Rate Hike

Key Facts

Sterling was little changed against the dollar on Oct. 29, despite U.S. economic growth accelerating to an annualized 3.4% in the third quarter, according to a Reuters report carried by MarketScreener. The British currency gained 0.52% against the dollar in October through that day, making it the best performer among major currencies, the same report said. The GDP reading was above economists’ expectations of 3%, according to a FactSet survey cited by The Associated Press. The economy grew at an annualized 2.2% in the second quarter, highlighting the acceleration in activity in the advance estimate for the third quarter. Market bets on a possible Bank of England rate hike helped support sterling, according to a TMG report included in the draft corrections.

The U.S. Bureau of Economic Analysis said increases in investment, consumer spending and government spending contributed to GDP growth, while lower exports and higher imports partly offset them. Real final sales to private domestic purchasers rose at an annualized 4.9% in the third quarter, compared with 4.6% in the second quarter, signaling continued domestic demand. Consumer spending rose at an annualized 3.8%, while business investment excluding housing increased 12.7%, according to The Associated Press. Investment in information-processing equipment surged 37.4%, while residential investment fell 3.3%. These components show that investment and domestic spending were among the main drivers of growth, with clear variation across investment sectors.

In price data, the core personal consumption expenditures price index, which excludes food and energy, rose 3.1% year over year in September and 0.3% from August, according to the Bureau of Economic Analysis. The monthly core increase matched August’s 0.3% rise. The overall index rose 3.6% year over year and 0.5% month over month in September. Nominal personal consumption expenditures increased 0.5% during the month, but real spending rose $2.6 billion, or less than 0.1% month over month. In August, real spending had risen 0.5%, showing that spending growth after adjusting for prices slowed in September.

September data showed U.S. personal income rose 0.2% during the month, while nominal personal consumption expenditures increased 0.5% and the personal saving rate was 3.8%, according to the Bureau of Economic Analysis. On the labor market, the economy added 29,000 nonfarm jobs in September, and the unemployment rate held at 4.2%, according to the Bureau of Labor Statistics, which described both changes as little changed. The average monthly job gain over the previous twelve months was 45,000. The jobless claims figure of 194,000 was for the week ended Oct. 17 and was reported by the Labor Department on Oct. 22; it was 6,000 below the revised level for the previous week. That figure does not refer to an Oct. 29 release, contrary to what appeared in the first draft.

Sterling’s support was also linked to expectations for British monetary policy. At its September meeting, the Bank of England held its interest rate at 3.75% by a 6-3 vote, with the three dissenting members backing an increase to 4%. The bank said information gathered in recent days showed a rise in the perceived likelihood of near-term rate increases, although most respondents to its September survey had expected rates to be held at that meeting. Against this backdrop, the bank expected British consumer price inflation to rise to 3.1% in August and continue climbing over the coming quarters as energy prices increased. Based on energy prices on Sept. 14, its projections indicated inflation could reach about 3.75% in the fourth quarter of 2026 and slightly exceed 4% in the first quarter of 2027.

By contrast, the Federal Reserve described economic activity as "expanding at a solid pace" and said inflation "remains elevated." Lisa Cook and Beth Hammack voted against holding rates at the Oct. 28 meeting, preferring to raise the target range by a quarter of a percentage point. This puts growth and inflation data at the center of attention on the U.S. policy path, alongside the Federal Open Market Committee’s next meeting on Dec. 8 and 9 and the press conference on Dec. 9. The Bank of England will announce its decision, the Monetary Policy Committee summary and minutes, and the Monetary Policy Report on Nov. 5. The U.S. October jobs report is due on Nov. 6 at 8:30 a.m. Eastern time, followed by the second estimate of U.S. third-quarter GDP on Nov. 25.