GBP 0.5% Up, Bargain Hunters Lend Support after Big Selloff

Sterling has erased all of its strong 2021 gains, down around eight cents since its June peak, as concerns weigh about British economic growth and inflation is expected to jump as the country grapples with a fuel crisis.

In early London trading, data showed gross domestic product increased by 5.5% in the second quarter, more than previously thought.

But sterling rose 0.5% versus a weakening dollar at $1.3494 at 1335 GMT, not far from nine-month lows touched the previous day. Versus the euro, the pound rose 0.5% to 85.94 pence.

“After the heavy selling pressure earlier this week, bargain hunters have lend some support to the pound,” said Jane Foley, head of FX strategy at Rabobank London.

Sterling has lost around 2% in September as gas station pumps ran dry in British cities, with vendors rationing sales as a shortage of truckers strained supply chains. The crisis cut road traffic volumes to the lowest since the COVID-19 lockdowns.

Analysts said concerns around employment have also kept investors on edge as Britain will wind up its COVID-19 jobs support scheme this week.

Bank of England Governor Andrew Bailey said on Wednesday he expects Britain’s economy to recover to its pre-pandemic level only next year, instead of in the final quarter of this year, as the BoE forecast in August.

“This seems at odds with some speculation that the BoE could hike as early as November,” said ING’s Chris Turner, global head of markets.

Amid growing pressure from rising energy prices and broader inflation, people in Britain are more pessimistic about the economy, according to an opinion poll by Kantar Public.

The five-year, five-year forward inflation-linked swap - a proxy for inflation expectations over the next five years - rose to 3.905% on Tuesday, the highest since daily records published by Refinitiv began in 2013, and up from 3.878% on Monday.

(Reporting by Joice Alves, Editing by William Maclean and Barbara Lewis)