Pound rises against weaker dollar, UK GDP unexpectedly rises

By Sophie Kiderlin

London, Oct 15 (Reuters) - Sterling was headed for its biggest daily rise against the dollar since mid-August on Thursday as the greenback weakened and data showed that Britain's economy unexpectedly grew in August. 

The pound was last up 0.5% to $1.3253, helped by a 0.15% slip in the dollar. A drop in US Treasury yields and stock market jitters weighed on the greenback in a "risk-off" environment, with traders navigating the macroeconomic backdrop and interest rate expectations. 

The euro was also buoyed by the dollar's dip, leaving sterling steady against the common currency at 84.60 pence per euro.

In domestic news, data from the Office for National Statistics reported a 0.1% increase in Britain's gross domestic product in August, as a further jump in the computer programming sector offered fresh evidence that AI was boosting growth. A Reuters poll of economists had forecast a 0.1% drop. 

Sanjay Raja, chief UK economist at Deutsche Bank, noted, however, that "there are signs that the engine of the UK economy is slowing from its torrid pace in the first half of the year," pointing to declines in some sectors.

"Undoubtedly, there may be some hiccups to come in the run-up to year-end, especially as energy prices continue to bite household incomes, and higher rates continue to drag on spending and investment. The good news? The UK's resilience story continues. It's hard to overstate how strong the UK performance has been all year," he said. 

The data comes not long before the UK budget later this month, which will be the first for British finance minister John Healey. 

Healey on Thursday said the budget would include measures to reinforce the resilience of Britain's economy to the Iran war energy price shock and offer "a bit of breathing space" to the country. He also reiterated that the budget will meet fiscal rules. 

Meanwhile, Bank of England Deputy Governor Sarah Breeden said on Thursday that cost-cutting by British companies in response to the energy price shock caused by the Iran war would make it easier for the central bank to contain inflation.

Her comments echoed those from BoE Governor Andrew Bailey earlier this week. 

Unlike other major central banks like the European Central Bank and Federal Reserve, the BoE has not hiked interest rates this year. Money markets are, however, pricing in at least one 25-basis point increase from the BoE by year-end. 

(Reporting by Sophie Kiderlin in London, editing by Alex Richardson)