Markets

The Pound Is Heading for Its First Weekly Gain in Eight Weeks. Thank the Dollar, Not Britain

Sterling traded near $1.333 on October 16, set to end a seven-week losing streak, after UK GDP unexpectedly grew 0.1% in August. The bigger force was a weaker dollar: the dollar index has slipped from Monday's one-year high of 102.58 to about 101.7.

For seven weeks in a row the British pound had lost ground against the dollar. On Friday morning it was on course to end that streak: GBP/USD traded at about $1.333 at 09:55 GMT, up 0.43% on the day according to Investing.com, heading for its strongest close since September 22 and a weekly gain of about 0.7%.

Britain did contribute something. Official figures on Thursday showed the economy grew 0.1% in August, against a Reuters poll forecast of a 0.1% contraction, and July was revised up to 0.4%. Sterling rose 0.5% to $1.3253 that day, its biggest daily gain since mid-August. The FTSE 100 added 1.1% to 10,840.35, its highest close since August 26 — though still short of the 10,910.55 record set in February.

But the main driver, as ING analysts quoted by Investing.com put it, was a broadly weaker dollar. The dollar index closed at 102.58 on Monday, October 12, its highest in a year. It fell 0.54% to 102.00 on Thursday as Treasury yields dropped, and traded near 101.7 on Friday morning. The euro, which makes up more than half of the index, climbed back to about $1.126 from a one-year low near $1.116 earlier in the week.

The difference matters for anyone trading the pound. A currency rising because its own economy surprised tends to hold its gains against everyone; one rising because the dollar is falling usually does not move much against the euro, and that is what happened this week. The Bank of England is still expected to raise rates to 4% in November, with chief economist Huw Pill warning that a hike should not be read as the start of a long series, and the UK budget lands on October 28.

The test for the dollar comes the same day: the Federal Reserve's decision is also due on October 28. Until then, sterling's direction is likely to be decided as much in Washington as in London.