GBP: UK Economic Resilience Supports Sterling Against Euro - Commerzbank

EUR/GBP is trading around 0.84326, with sterling maintaining relative strength in the cross. Commerzbank analyst Thu Lan Nguyen noted that UK August GDP data came in strong, beating expectations for the fourth consecutive month, which provides the Bank of England with more room to raise rates and eases pressure on the Chancellor's deficit reduction plans.

**Better-than-expected economic data provides support**

Data from the UK Office for National Statistics showed August GDP rose 0.1% month-on-month, versus market expectations of a 0.1% decline; the annual growth rate reached 2.1%, the strongest performance since October 2022. Manufacturing surged 1.2% month-on-month during the period. Paul Dales, chief UK economist at Capital Economics, said the data extends the notable resilience of the UK economy under the pressure of high energy prices and borrowing costs, but he still expects higher inflation to weigh on future growth.

**Divergence in central bank policy paths favors sterling**

Market reports indicate investors are focusing on the differences in rate-hike logic between the Bank of England and the European Central Bank. The UK's relatively steadier growth momentum allows the BoE to focus more on controlling inflation. Samuel Fuller, director of Financial Markets Online, said the market broadly expects the BoE to raise its benchmark rate to 4% within three weeks. In contrast, the ECB's rate hikes are more driven by imported inflationary pressures, leaving its policy space relatively reactive.

**Fund flows and cross-currency dynamics**

According to reports, some funds have shifted from Europe to the UK based on the divergence in growth prospects between the UK and the eurozone, putting pressure on the EUR/GBP cross. Commerzbank's Volkmar Baur emphasized the UK economy's resilient growth, with upward revisions to GDP and solid monthly data; given that inflation remains sticky, with core inflation at 2.6%, he currently expects the BoE to have further room for action. Overall, sterling's relative strength against the euro retains fundamental support in the near term.