CAPITALDIGEST MARKET REVIEW, 14/09/2026

POUND CLIMBS AFTER UK GROWTH BEATS EXPECTATIONS 

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.  

DOLLAR RISES AGAINST EURO AND SWISS FRANC AFTER US INFLATION DATA

The dollar edged higher against the ​euro and Swiss franc on Friday after U.S. inflation data showed a rise in consumer prices, ‌reinforcing expectations that the Federal Reserve will raise interest rates next week. The dollar initially gained after the data release. However, investor sentiment remained fragile as an escalating Iran war pushed up oil prices, limiting the U.S. currency’s advance and leaving it little changed against its ​peers. Labor Department data showed the U.S. Consumer Price Index increased 0.4% in August after edging up 0.1% in July. ​Core CPI increased 2.4% year-on-year in August after rising 2.5% in July. The euro was down ⁠0.13% at $1.15950 and was on track for a weekly loss. The dollar strengthened 0.47% to 0.817 against the franc. ​It was set for its third straight weekly gain against the Swiss currency. “The main thing we’re looking at is ​core CPI, which seems to be accelerating,” said Juan Perez, director of trading at MonexUSA. “What that does do — which tends to help the U.S. dollar go up against all currencies — is increase the interest rate probability or odds that the Federal Reserve will raise rates ​at their next meeting.” Markets are pricing in about an 86% chance of a 25 basis-point hike, compared with around ​72% a day earlier, according to the CME’s FedWatch tool. U.S. Treasury yields remained near multi-year highs, with the 2-year yield, which typically ‌moves in ⁠step with Fed rate expectations, up 7.75 basis points at 4.63%. 
 
 

STERLING HOLDS STEADY AGAINST EURO AHEAD OF ECB DECISION 

The pound was little changed against the euro and the dollar on Thursday as investors awaited an expected European Central Bank interest-rate rise, while ​oil held above $100 a barrel, limiting appetite to take strong positions across markets. Adding ‌to the uncertainty were U.S. inflation reports due on Thursday and Friday that could either reinforce expectations of a Federal Reserve rate increase next week or weaken the case for tighter policy. Sterling has traded ​in a narrow range against the euro for much of the past six ​weeks, with the single currency largely holding between 85.4 pence and 85.6 ⁠pence. On Thursday, the euro traded at 85.89 pence, little changed on the day. The ​pound edged up against the dollar to $1.355. Money markets expect the ECB to raise euro zone ​rates by a quarter point to 2.5% on Thursday, with another increase almost fully priced in by the end of this year and an 80% chance of a third by March. By contrast, the Bank ​of England is not expected to raise rates next week. Markets have priced in ​only two increases between now and March, a path many analysts view as too aggressive, particularly after ‌Governor Andrew ⁠Bailey pushed back against such expectations. UK GDP data for July are due on Friday. Economists polled by Reuters expect the economy to have stalled after growing 0.3% in June, leaving annual growth at 1.2%, up from 1.1% the month before. Strong growth in the first ​half of the year ​has put Britain ⁠on track to be one of the G7’s fastest-growing economies. However, support from unusually warm weather and the soccer World Cup is likely to ​fade, posing risks to both the pound and the interest-rate outlook, ​said George ⁠Vessey, lead FX and macro strategist at Convera. “For sterling, that creates an important test. A stronger (GDP) reading would help justify the roughly three rate hikes currently priced by summer 2027. However, ⁠any ​evidence that growth is losing momentum could trigger a ​dovish reassessment of those expectations, eroding sterling’s yield advantage and leaving the pound more vulnerable to downside pressure.” UK inflation ​and wage growth data are due next week. 

DOLLAR RISES, EURO SLIPS AFTER ECB RATE INCREASE 

The dollar rose against major currencies on Thursday, recouping some of the week’s losses that ‌were sparked by higher oil prices and bond yields, while the euro slipped after the European Central Bank delivered a widely expected interest rate increase. The ECB raised interest rates by 25 basis points, marking the second time this year the central bank has moved to quell an energy-driven rise in inflation triggered ​by the Iran war. The euro dropped immediately after the decision and was last down 0.19% against the dollar ​at $1.1612, as markets worried about the economic impact of future hikes with ECB policymakers aiming to tame ⁠inflation. U.S. producer prices appeared to drive the dollar’s gains after data matched market forecasts and reinforced expectations of a Federal Reserve rate hike ​next week, said Eugene Epstein, head of structured products for North America at Moneycorp. “ECB rate hike odds have all increased ​so I would argue it was hawkish but I really think the main driver of the stronger dollar, which is the case across all currency pairs, is the PPI. I think markets are quite jittery ahead of tomorrow’s CPI, which is really the main event,” he said. The ​dollar strengthened 0.35% to 0.813 against the Swiss franc . Markets are eyeing the U.S. CPI, which is due on Friday, and a strong ​reading would likely spur a dollar relief rally, said Bank of America analyst Alex Cohen in an investor note. “A hot print could support ‌a relief ⁠rally, but sustained USD strength still likely requires Fed follow-through,” he said. 

POUND NEARS TWO-WEEK HIGHS; BAILEY SAYS ‘NO SECRET PLAN’ FOR RATE HIKE 

The pound edged towards two-week ​highs against the dollar on Wednesday, shrugging off a rally in the oil price above $100 a ‌barrel as the conflict in the Middle East widened. With crude now 40% above where it was prior to the start of the war at the end of February, and European natural gas prices around three times higher, central banks are under pressure to ​raise interest rates. Britain is especially reliant on energy imports. Consumer inflation picked up to a rate ​of 2.9% in July, from June’s 15-month low of 2.6%. Money markets show traders do not ⁠expect the Bank of England to raise interest rates when it meets next week, but at least two ​hikes are priced in by next March, with a 40% chance of a third by then . The Federal Reserve, ​by contrast, is only expected to raise rates twice by that point, according to the rates market . The pound was last a touch stronger on the day at $1.3545, its highest since August 28. It has been one of the better-performing major currencies against the ​dollar this year, with a gain of 0.5%, compared with a 1% drop in the euro , or the 2% ​decline in the yen. Much of sterling’s tailwind has come from the expectation that the BoE will have to raise ‌interest ⁠rates, especially with growth holding up. Economists and analysts are at odds with the market, as is BoE Governor Andrew Bailey, who on Tuesday pushed back against the idea of a rate hike being inevitable. “What I want to dispel is the idea that we’ve really got a secret plan, we know where we’re going to go to and it’s ​unconditional,” he said at a ​hearing before lawmakers in ⁠parliament. There is good reason for the belief that higher energy prices could be a factor in the rate outlook, according to ING strategists, who say that, since the ​start of the Iran war, every $10 increase in Brent has added around 15 basis ​points to 2-year ⁠rates, compared with 11 bps for euro zone rates and 8 bps for U.S. ones. The British rate outlook, as reflected by the market, appears to be overdone, ING strategist Michiel Tukker said, but the level of uncertainty around the ⁠oil price ​and the fiscal risks ahead, starting with the Autumn Budget next ​month, complicate the prospects for the pound itself. “Only once the predictability of oil prices improves do we see scope for tactical opportunities. But with ​oil likely to test $100 again, we stay on the sidelines,” he said.