Pound climbs after UK growth beats expectations

LONDON, Sept 11 (Reuters) - The pound rose slightly on Friday after data showed UK growth beat expectations in July, continuing a string of relatively upbeat readings for the British economy.

British gross domestic product grew 0.4% in July, figures from the Office for National Statistics showed, far outstripping economists' forecasts that the economy would flatline.

Sterling rose 0.1% to $1.352 and climbed a similar amount against the euro. The euro zone's currency was down 0.1% against the pound to 85.84 pence.

Growth was driven by the services sector, which expanded 0.4% month-on-month, the figures showed. 

Britain's economy expanded 1% in the first half of the year, the fastest growth in the G7, although some economists think issues with seasonal adjustments could mean the figure is overstated. That means it could beat the Bank of England's forecast of 1.1% growth in 2026, although some analysts think the data could be revised lower.

Investment in AI is helping drive growth in sectors such as telecoms and information services, said Sanjay Raja, chief UK economist at Deutsche Bank.

"The UK growth story is becoming harder to ignore," he said. "Households and businesses are still spending – despite the unfolding energy shock impacting disposable incomes."

Britain's economy has fared better than expected in the face of rising energy costs due to the Iran war, but the threat to growth still lingers, with Brent crude oil prices rising to $110 a barrel for the first time since May.

The rise in energy costs has driven traders to ramp up their bets on interest rate hikes and helped send bond yields to multi-year or even multi-decade highs around the world.

Britain's benchmark 10-year yield rose to its highest since 2007 on Thursday near 5.4% while the 30-year yield reached levels not seen since 1998 at almost 6%. Yields rise as prices fall and vice versa.

Economists expect the Bank of England to hold interest rates at 3.75% at its meeting next week, but traders are almost fully pricing in a hike in November and expect roughly three more increases by the middle of 2027.

However, BoE Governor Andrew Bailey on Tuesday said the market pricing showed a "risk premium" that reflected worries in the market about further energy price increases and that he wanted to dispel the idea that it is just a matter of time before the central bank raises interest rates.

(Reporting by Harry Robertson; Editing by Alexander Smith )