Sterling falls after shock contraction in UK GDP

(Updates with midmorning trading, comments)

By Amanda Cooper and Harry Robertson

LONDON, Dec 13 (Reuters) - The pound fell on Friday after data showed the British economy shrank unexpectedly in October, which could prompt traders to attach a greater chance to the prospect of speedier rate cuts by the Bank of England next year.

Official data showed UK economic activity contracted 0.1% in October. A Reuters poll of economists had forecast a rise of 0.1% last month, from September's 0.1% fall.

This was the first back-to-back decline since the onset of the COVID-19 pandemic in 2020, when Britain imposed the first lockdown.

Sterling initially fell as much as 0.43% after the numbers and was last down 0.3% at $1.2635.

"The market will be surprised, this is not part of the game plan. However, the outlook for 2025 does look more encouraging," Neil Jones, managing director, FX sales and trading for financial institutions, TJM Europe, said.

"I would expect further limits to any pound sell-off and gilt rally. Wages and inflation will likely remain solid and dissuade the BOE from shifting lower, relative to the Fed and ECB expectations," he said.

The pound was last down 0.4% against the euro at 82.895. Sterling is set for a second monthly gain against the euro, which has fallen 0.6% in December so far to trade around its weakest in over eight years.

In part, it is the expected difference in interest rates in Britain and the euro zone, as the BoE is likely to move more slowly on cuts than the European Central Bank.

The ECB cut rates as expected by a quarter point on Thursday, but sounded a cautious note on the outlook for inflation, which might mean it does not have the scope to deliver the almost five cuts markets have priced in for 2025.

The BoE, meanwhile, may find it needs to act more swiftly to head off a more protracted slowdown in the British economy.

Recent data on business activity showed a deterioration in the manufacturing sector. Grocery inflation is creeping up, squeezing the budgets of British households, while the labour market is sputtering.

Data earlier this week showed job vacancies have dried up faster in the UK than in other similar countries over the past year.

A separate report on employment on Dec. 9 showed demand for UK workers crashed in November, after the Labour government's first budget, in a sign of the impact of the tax increases for employers that it contains.

(Reporting by Amanda Cooper; Editing by Harry Robertson and Ros Russell)