Why is UK growth so strong, and why hasn’t the pound reacted?

Blog By David Stritch, Senior Multicurrency Analyst, Caxton

Why is UK growth so strong, and why hasn’t the pound reacted?

The UK economy grew 0.7% in the three months to August, the strongest rolling figure in months and well ahead of expectations. Sterling has barely moved, though. GBP/EUR is drifting just below last week’s 16-month high, while GBP/USD has recovered mainly because the dollar has given back its post-inflation gains.

Key takeaways

• UK GDP grew 0.7% in the three months to August 2026, up from 0.5% in the previous two readings.
• Services drove the growth, but consumer-facing services fell for a second month. That suggests households are tightening their belts.
• The pound has largely ignored the data. GBP/EUR is easing back from last week’s high, and GBP/USD has recovered as the dollar retreats.
• US inflation hit 3.7% in September. That briefly lifted the odds of a Federal Reserve rate hike this month before they settled back.

What happened to UK growth?

Growth was strong and better than expected. Monthly GDP grew 0.1% in August, following 0.4% growth in both July and June, and the economy grew 0.7% across the three months to August, up from 0.5% in each of the previous two three-month periods.

The detail is less tidy than the headline. Services grew 0.9% over the three months and were the only positive contributor to growth. Upward revisions to June and July did much of the work, since services showed no growth in August itself. In August, production grew 0.8% while construction fell 0.2%. That rebound in output came to the rescue in a month when the high street stalled. 

The consumer picture is where the caution lies. Consumer-facing services fell for a second month in August, down 0.3% overall. Sports and recreation fell 7.1%, and food and beverage services fell 2.7%. Accommodation and personal services also fell. Retail and travel agency activity held up, rising 0.5% and 1.2% respectively. People are still booking trips and buying goods, but they are cutting back on nights out.

Why does this matter ahead of the Budget?

The figures give the Treasury some breathing room. The run-up to a UK Budget is rarely filled with optimism, especially in difficult financial times like these. This time, the Government still appears to be pulling its plans together, so there haven’t been the usual leaks that trigger negative speculation and weigh on the pound.

A 0.7% rolling growth rate means the Chancellor doesn’t need to build cratering activity levels into the plans. Stronger growth also improves the tax-take arithmetic, which could reduce the scale of tax rises or spending cuts. Markets would welcome that.

There is a rates angle too. Some economists say the beat strengthens the case for a Bank of England hike. Pantheon argued that stronger growth reinforced its call for a November rate rise. Higher expected UK interest rates would normally support sterling.e

Why hasn’t the pound moved on the news?

The pound has taken little notice of the data, because other forces are steering it. GBP/EUR was broadly unchanged at around €1.1816 this morning, slightly below the 16-month high of €1.1838 reached on Monday. 

Much of sterling’s recent strength against the euro came from France rather than Britain. French debt concerns helped the pound gain roughly 0.4% against the euro last week. That crisis hasn’t gone away. It is waiting for a quiet stretch in the data calendar, when traders will turn their attention back to French finances and the euro could come under pressure again. 

GBP/USD has made a stronger recovery, mostly because the dollar is giving back yesterday’s gains. The pair traded near $1.3264 this morning, up 0.25% from Wednesday’s close.

What is happening with the US dollar?

The dollar jumped on hot inflation data and is now retreating. US consumer prices rose 3.7% year on year in September, up from 3.4% in August. Rising fuel costs were a major driver. Gasoline prices jumped 9.1%. 

The Federal Reserve raised rates in September for the first time in over three years, and the data put another move back in play. The probability of a hike at the 27–28 October meeting jumped from 16% to 44%, then eased back to 29% today. That pullback is why the dollar has lost some of its gains. Several key Fed policymakers have said in recent days that there is no need to rush another hike. 

What is the market watching next?

Three things stand out:

• The Fed decision on 28 October. A surprise hike would likely strengthen the dollar.
• The Bank of England in November. If expectations of a UK rate rise firm up, sterling could gain support.
• The UK Budget and French politics. Any Budget leaks could unsettle the pound. A flare-up in France could weaken the euro.

What does this mean for businesses and individuals with currency exposure?

GBP/EUR rates near 16-month highs give euro buyers a strong level to work with. However, that strength depends partly on France’s problems, and those can ease as quickly as they flare. If you pay European suppliers or are planning a large euro transfer, consider whether to secure part of your requirement now. A forward contract fixes today’s exchange rate for a payment you’ll make later.

Businesses that earn in euros face the opposite problem. A strong pound reduces the sterling value of their revenue, so they may want to hedge future receipts.

For dollar flows, volatility around the Fed meeting is the main risk. A rate alert can notify you when GBP/USD reaches a target level, so you don’t have to watch the market all day.

David’s view

My read is that this is good news the pound didn’t need yet. Sterling is already trading near multi-month highs against the euro, mostly because France looks worse rather than Britain looking better. The growth figures add a firmer floor. If the Budget avoids nasty surprises and the Bank of England stays hawkish, sterling’s case looks more balanced than it has in a while. The soft consumer data is the warning light. If households keep cutting back, today’s optimism could fade quickly.

FAQ

How much did the UK economy grow in the three months to August 2026?
Real GDP grew 0.7% compared with the three months to May, according to the Office for National Statistics. The services sector led the growth, while production and construction fell over the period.

Why didn’t the pound rise on strong UK GDP?
Sterling was already trading near a 16-month high against the euro, mainly because of French fiscal concerns. Against the dollar, US inflation and Federal Reserve expectations are having a bigger effect than UK data.

Will the Federal Reserve raise rates in October 2026?
Markets currently see a hike at the 27–28 October meeting as possible but not the most likely outcome. Odds rose sharply after September’s 3.7% inflation reading, then fell back.

Is now a good time to buy euros?
GBP/EUR is close to its strongest level in 16 months, but nobody can guarantee where rates will go next. Many businesses secure part of their requirement at strong levels and leave the rest flexible.

What are consumer-facing services?
These are businesses that sell directly to households, such as restaurants, leisure, hotels and personal services. The ONS tracks them separately as a gauge of consumer spending.

Speak to the team

Strong rates don’t last forever, and turning points can be sudden. If you have euro or dollar payments coming up, speak to one of Caxton’s multicurrency dealers. They can help you secure today’s rate with a forward contract or set an alert for your target level.

Markets Today

Please be aware the below rates represent the market rate at 7:30 AM. Contact your Caxton dealer or check online for a live quote.

This article is for information only and does not constitute financial advice. Exchange rates can move quickly and past performance is not a guide to future performance.