Sterling tumbles after UK economy shrinks

London: The pound was among the worst performing major currencies against the dollar on Wednesday, after data showed the UK economy shrank in October, raising the risk of recession and possibly complicating the Bank of England’s messaging on rates.

The Office for National Statistics said UK gross domestic product contracted by 0.3% in October, against forecasts for a no change.

Britain’s economy avoided a contraction in the July-to-September period – when it also showed no change – but some analysts think it remains at risk of a shallow recession in late 2023 and early 2024 after the BoE’s increases in interest rates.

Sterling was last down 0.3% against the dollar at $1.2526, compared with a decline of 0.1% in the euro and 0.2% in the yen .

The futures market showed traders now believe there could be almost a full percentage point in rate cuts next year, from around 75 basis points at the start of the week.

Consumers and businesses alike are feeling the pinch from still-hot inflation and interest rates at their highest in nearly 16 years.

“This data is historic but it’s all about what happens next, and we will hear the thoughts of major central banks in the next two days. The Bank of England will be pleased that their actions have worked, but worried that they have gone too far. We will find out tomorrow,” Neil Birrell, chief investment officer at Premier Miton Investors, said.

So far this year, the pound has risen by around 3.8% against the dollar, marking its best annual performance since 2019, driven in large part by an expectation that the Bank of England could be much slower in cutting rates than other central-bank counterparts.

Goldman Sachs on Wednesday lowered Britain’s 2023 economic growth rate forecast to 0.5%, from its previous outlook of 0.6%, after the GDP data.

Paul Dales, chief UK economist at Capital Economics, said the October data suggested Britain might be in a recession.

“That may nudge the Bank of England a little closer to cutting interest rates, although when leaving rates at 5.25% tomorrow the Bank will probably push back against the idea of near-term rate cuts,” he said.