Sterling gains as UK GDP beats expectations, markets remain 'unruffled' ahead of Autumn budget

Sterling was among the best performing major currencies last week, gaining almost 1% against the dollar and edging higher against the euro, and gilts rallied alongside the global bond market. August GDP surprised to the upside, and annual growth is now the strongest in four years.

While we don’t think that this will be enough in of itself to convince the Bank of England to raise rates next month, it won’t do anything to dissuade policymakers to hike and swaps continue to almost fully price in 25 basis points of tightening. However, Governor Bailey said last week there was little evidence so far of energy prices feeding into wages and broader prices, which makes Tuesday’s wage data and Wednesday’s CPI figures critical.

Investors will inevitably also have one eye on next week’s Autumn Budget. The IMF has said that the UK need not speed up its deficit reduction, though it also warned that Britain would need to stay the course with its fiscal consolidation, rather than giving it a free pass.

Markets so far appear unruffled as we head into budget day, which could open up some downside should the government fail to sufficiently rebuild the fiscal headroom, while unveiling bigger spending increases and back-loaded tax hikes that could deepen the fiscal quagmire and weigh on the growth outlook.