Stronger U.K. GDP Data Further Dampens Bank of England Rate Cut Expectations, Says Mitsubishi UFG

09:27 AM EDT, 08/14/2025 (MT Newswires) -- Sterling (GBP) is continuing to trade on a stronger footing since last week's hawkish Bank of England Monetary Policy Committee policy update, said MUFG.

After hitting a high of 0.8769 at the end of last month, EUR/GBP has fallen back closer towards the 0.8600 level encouraged by the scaling back of BoE rate cut expectations, wrote the bank in a note to clients.

The current bullish trend for sterling was supported early Thursday by the release of the latest United Kingdom gross domestic product report for Q2, stated MUFG. The report revealed that the U.K. economy slowed in Q2 but less than feared.

Real GDP expanded by 0.3% quarter over quarter in Q2, down from the strong growth of 0.7% recorded in Q1. At the BoE's last policy meeting, the central bank's staff had been estimating GDP growth of 0.1% in Q2, followed by a pick-up in growth to 0.3% in Q3.

The monthly data revealed that growth picked up more strongly than expected by 0.4% month over month in June, following contractions of 0.1% in both April and May, and in doing so shows stronger growth momentum heading into Q3. The sector-by-sector breakdown revealed that services expanded by 0.4% in Q2, construction by 1.2% while production contracted by -0.3%.

However, the positive impact on sterling from stronger headline growth has been dampened somewhat by the less favorable breakdown of expenditure in Q2. As the ONS highlighted, growth was mainly driven by increases in government consumption (1.2%) and the other category of gross capital formation, which includes changes in inventories, acquisitions less disposals of valuables and expenditure alignment adjustment.

In contrast, private consumption and business investment were weaker than expected. Private consumption increased by just 0.1% in Q2, down from 0.4% in Q1. Business investment was even weaker, although it is volatile and prone to revisions. It contracted by 4.0% in Q2 following an increase of 3.9% in Q1.

Overall, the report is unlikely to alter market expectations that the BoE is becoming more cautious over delivering further easing this year, ae MUFG. The BoE indicated earlier this month that it is less confident it will continue to cut rates every quarter.

The U.K. rate market is now pricing in less than a 50:50 probability of another 25bps BoE rate cut in November, according to the bank.

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