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The British pound and government bond yields fell Wednesday after data showed the U.K. economy unexpectedly contracted in October, boosting expectations that the Bank of England will hold interest rates at its meeting this week but start cutting next year.
The Office for National Statistics said U.K. gross domestic product fell 0.3% from September to October, as activity in the manufacturing, services and construction sectors all declined. Economists had forecast no change in GDP , following a 0.2% expansion between August to September.
“Awful weather and the disruption caused by strikes won’t have helped, but even with the continued squeeze on consumer spending, the contraction in economic growth recorded in October was greater than had been expected,” said Danni Hewson, head of financial analysis at AJ Bell.
“All sectors of the economy were affected as the impact of two years of interest rate hikes work their way through the system,” she added.
Source: ONS
The softer data chimes with a U.K. jobs report on Tuesday, which showed vacancies falling for the 17th consecutive month and slower than expected wages growth. Together they cemented market expectations that the Bank of England will not raise interest rates after its monetary policy committee meeting on Thursday, analysts said.
“On the back of a 0% quarterly reading over Q3, October’s data is a worrying start to the Q4 season and shines a light once again on recession risks in the U.K.,” said James Harte, analyst at Tickmill Group. “The bigger focus on the back of this data will be the Bank’s forward guidance and whether members now signal likely cuts coming in 2024.”
Markets now see the BOE trimming borrowing costs by 25 basis points to 5% in June, and up to 95 basis points of cuts by the end of the year, up from 75 basis points earlier this week.
The pound
GBPUSD,
fell on the news, trading down 0.3% to $1.2520, while the policy-sensitive 2-year gilt yield
BX:TMBMKGB-02Y,
which started the week around 4.60%, fell a further 7.8 basis points to 4.417%, its lowest since June.
The slide in U.K. bond yields again helped interest rate-sensitive parts of the London stock market, with shares of builders and real estate groups lifting the FTSE 100
UK:UKX
by 0.3%.
Frankfurt’s DAX
DX:DAX
added 0.1% and was eyeing another record high as 10-year German bund yields
BX:TMBMKDE-10Y
fell to an eight-month low of 2.195% after the government reached a deal to resolve its budget crisis.
The euro
EURUSD,
was little changed around $1.0785 ahead of the European Central Bank’s policy decision on Tuesday. The ECB is expected to keep rates at 4%.
