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The British pound welcomes a GDP upgrade and looks through the Burnham speech to the budget.
The British pound rises in midweek trade, supported by elevated bond yields and news the ONS has upgraded its previous economic growth assumptions.
"The UK economy defies the gloom as GDP is revised higher," says Martin Beck, Chief Economist at WPI Strategy.
The ONS revised Q2 GDP growth up to 0.5% from 0.4%, "strengthening the evidence that the economy proved more resilient than expected through the spring and early summer despite the fallout from the Iran war," says Beck.
UK economic performance has consistently surprised to the upside in 2026 and that's consistent with an outperformance in the British pound.
The pound-to-euro exchange rate recovers the previous day's setback to rise to a two-week high at 1.1678. The pound-to-dollar pair is less enthused, consolidating at 1.3248, but this price action is entirely consistent with the USD's dominance.
The pound's rise will be throttled by uncertainty into the October 28 budget, and downside risks will be elevated, but the economy's resilience sets it up for gains once that set-piece has passed.
"The real acid test for Burnham and his Chancellor, John Healey, will be next month’s Budget, particularly with the government’s fiscal headroom rapidly dissipating. However, being able to point to Britain having the fastest-growing economy in the G7 over the first half of 2026 is no bad thing at all," says Thomas Watts, MPS Portfolio Manager at Julius Baer.
Pound Sterling Live maintains the view that budget anxiety should cap the pound's upside but that a rally should ensue if the budget is uneventful and currency markets refocus on Britain's solid economic fundamentals.
July's 0.4% increase in GDP gives the third quarter a strong start and a platform to defend this year's economic gains.
However, Beck warns high petrol and diesel prices, rising household energy bills and "uncertainty ahead of the Budget are likely to take some momentum out of growth over the coming months."
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistPound Better Poised Against Euro Than The Dollar
From a currency perspective, those elevated energy prices will also apply to the Eurozone, ensuring there's no meaningful penalty to sterling.
However, the U.S. is a net exporter of energy and the elevated prices should help the country's trade balance, and, in theory, the dollar.
Certainly, the dollar is outperforming as the solid U.S. economic pulse, driven by AI investment, continues, allowing the Federal Reserve to look forward to further interest rate rises.
A strengthening dollar looks set to be a feature of the landscape for a while longer.
Surging Interest Rates are Key to Pound Sterling's Ongoing Resilience
The yield on UK government debt sits at multi-decade highs and is higher than in most comparable G10 economies, ensuring global investors are drawn to UK government debt where they can earn superior returns.
This is known as the carry trade, and the pound naturally benefits from that inward flow of capital.
Britain on Tuesday issued fresh ten-year bonds, with an average coupon of 5.383%, the highest rate for that specific length of debt since 1999.
Crucially, the auction was well over-subscribed, confirming demand for UK debt remained strong.
As long as the appetite is there, sterling should be fine.
Burnham Knows His Dreams Will Have to Wait
Image: Andy Burnham, source: Labour Party, Copyright: Pound Sterling Live.
The elevated coupon and rising yield on market-traded bonds reflect the high interest rates the government is paying to borrow, and underpin the stresses facing the public finances.
On Tuesday, Andy Burnham laid out an optimistic left-wing and socialist vision for the country, but it will cost billions and billions of pounds to realise. In subsequent interviews, the PM was repeatedly asked about the cost, and he failed to give numbers but argued he "has a good idea".
He knows he doesn't have the money to pay for that vision, and he doesn't have the mandate to raise the major taxes to pay for it, leaving him with a pitch that his dreams will be delivered on a ten- to 15-year timeline.
For the market, Burnham's sober acknowledgements mean no major changes are likely at this month's budget, which limits the odds of a major fiscal blunder.
That's enough to keep the market focussed on the yield and the positive GDP stories.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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