LONDON (Reuters) - A mixed bag of economic numbers pushed sterling higher against its major currency peers on Friday, with upbeat foreign investment inflows at the end of last year offsetting another set of warning signs on household spending.
The pound fell initially on the detailed breakdown of fourth quarter gross domestic product and other data that showed consumers borrowing more, and the dominant services industry contracting for the first time since last March.
But a rough halving of Britain’s huge current account deficit as a percentage of output, and a rise in foreign direct investment to 110 billion pounds, offered hope that one of the economy’s big vulnerabilities may already be fading as ministers begin 18 months of talks on leaving the European Union.
Driven by a late surge around month-end fixing of major currencies at 1500 GMT, that hope helped the pound gain almost half a percent on the day to $1.2516 by 1513 GMT. It was also 0.2 percent higher at 85.41 pence per euro.
“The marked improvement in the current account (and FDI income) suggests that at these levels sterling is helping the UK erode the large external imbalance that contributed to the currency’s drop after the Brexit vote,” AXA analysts said in a note.
“This should limit downside appetite for the currency even as we expect negative headlines from preliminary EU negotiations to mount.”
Sterling has fallen about 20 percent as investors factored in the risks that a “hard” exit will take Britain out of Europe’s single market in favour of imposing controls on immigration and lowering trade barriers with other partners.
It fell close to $1.20 this month after a handful of signals suggested previously robust consumer demand was beginning to fade as the drop in the currency feeds through into higher prices of imported goods.
The data on Friday also showed British households ran down their savings to a record low in late 2016 as they sought to offset a fall in their spending power. A survey showed consumers were worried about the outlook for the economy and there was a surprise fall in house prices.
“The (GDP) report on the whole speaks of fundamental structural weaknesses in the UK,” Bank of New York Mellon currency strategist, Neil Mellor, said.
“The market got a negative impression and as much as there may be mitigating circumstances, the fact still remains that we have seen a run down in savings ... so all in all not a positive report for sterling.”
London-based strategist, Lee Hardman from Japan’s MUFG, has been arguing consistently for a stronger pound in recent weeks. He said the revised data would not change much for the recent stability in sterling.
“We saw a sharper-than-expected narrowing in the current account deficit which may have helped to ease the margins for the concerns over the potential downside risks for the pound going forward during the upcoming Brexit negotiations,” he said.
Political uncertainty surrounding Brexit and signs the UK economy is slowing as Britain enters a negotiating period with the EU have also seen investors take net short positions on the pound versus the dollar to record highs. [IMM/FX]
Latest positioning numbers for the week to last Tuesday are due later on Friday.
Draft negotiating guidelines from the European Union showed Britain would need to make sufficient progress on its exit talks with the bloc before pursuing a new trade deal.
EU Council President Donald Tusk said talks between the EU and Britain to negotiate Brexit will be difficult and sometimes confrontational. There would be no parallel talks on issues outside of that, he said.
Investors are also contemplating the risk of a broader breakup of the United Kingdom.
Scottish First Minister Nicola Sturgeon has written to Prime Minister Theresa May formally demanding that she allow a second referendum to be held on Scottish independence ahead of the United Kingdom’s exit from the European Union.
Editing by Louise Ireland