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Sterling falls as UK economy shrinks more than expected

LONDON, Sept 13 (Reuters) – The pound weakened against the dollar on Wednesday after Britain’s economy shrank at the fastest rate in seven months in July as strikes and bad weather hit output.

Sterling was down 0.4% against the dollar at $1.2442, its lowest level since June 8. It was last at $1.2472.

The euro strengthened 0.3% against the British pound at 86.3 pence, reaching its highest level in a month, although last seen little change at 86.08 pence.

Office for National Statistics (ONS) data showed the UK economy shrank 0.5% in July, a worse-than-expected contraction of 0.2% and the biggest fall in monthly output since December 2022.

“The decline in GDP in July shows that underlying growth has lost momentum from the start of the year,” said Paul Dales, chief UK economist at Capital Economics. “It makes sense that the impact of higher interest rates should be starting to be felt a little more now.”

The Bank of England has raised interest rates 14 times since December 2021, taking them to a 15-year high of 5.25%.

Money market traders are pricing in about an 80% chance that policymakers will raise interest rates again at next week’s meeting and a 20% chance that rates will remain in place. Meanwhile, terminal rate pricing has declined from more than 6% to about 5.6%.

UK pound coins are immersed in water with the colors of the European Union flag in this illustration photo taken on October 26, 2017. Reuters/Dado Ruvik/File Photo Get licensing rights

“Market pricing is still way over the top, in my view, but it’s in line with where it should be,” said TraderX analyst Michael Brown.

“We are probably going to see further decline in the pound and I still don’t see much reason for optimism about the UK economy going into the autumn.”

The pound peaked above $1.31 in mid-July but has since fallen more than 5% as the dollar, measured against a basket of currencies including the pound, has hit its highest level since March.

“You’ve got this blatant deflation in the U.S., where the labor market remains strong and gross domestic product is growing 2% every quarter,” Brown said.

“I don’t see any reason to bet against the dollar at this point because the US economy has everything going for it.”

The ONS said other factors also weighed on British growth in July, including strikes in hospitals and schools, while wet weather hurt output in the retail and construction sectors.

Wednesday’s figures did not include recent, substantial upward revisions to the economy’s performance by the end of 2021.

Reporting by Samuel Indik; Editing by Amanda Cooper, Sherry Jacob-Phillips and Katherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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Source: www.reuters.com

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