February 11, 2020 / 9:18 AM / 2 months ago

Sterling bounces following economic growth data, still close to 2020 low

LONDON (Reuters) - Sterling enjoyed some respite on Tuesday after British economic growth showed no change in the fourth quarter despite market expectations that it would be slower.

Pound banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

The currency had on Monday touched its lowest levels for this year amid uncertainty over Britain’s future trade relationship with the European Union.

Preliminary data for fourth-quarter gross domestic product showed the economy grew 1.1% year-on-year, the same as in the previous quarter. Economists polled by Reuters had forecast growth of only 0.8%.

The data came as a reassurance to investors that the Bank of England (BoE) was unlikely to pursue a looser monetary policy. At its previous meeting, the BoE signalled it was more interested in seeing if growth picked up after the December election.

“Few expected fireworks from a report that focuses on the final months of election and Brexit uncertainty,” said Karim Yousfi, chief global strategist at Audacity Capital.

“So this is more a case of not good, but good enough. With a clear majority of the Bank of England’s interest rate-setting grandees already reluctant to cut rates, this GDP print will give them no impetus to cut any time soon.

“For this reason, the pound is pepping up against both the dollar and the euro,” Yousfi said.

Investors brushed off data on Britain’s manufacturing output, which fell 2.5% year-on-year in December, a bigger fall compared with market expectations, and compared with a 2% fall the previous month.

Sterling was last trading up 0.3% at $1.2949 after reaching as high as $1.2968. That left it still close to the 2-1/2-month low of $1.2873 it fell to on Monday. A broadly stronger dollar had compounded the pound’s weakness before Tuesday’s recovery.

Against the euro, the British currency climbed 0.3% to 84.29 pence.

“Overall the muddy waters in the data pool are unlikely to change market positioning, and longtime sterling strength will rely on BoE expectations and trade developments,” said Sam Cooper, vice president of market risk solutions at Silicon Valley Bank.

The British government has demanded that the EU sign up to an agreement which would ensure the City of London can maintain access to European financial market after Brexit.

Analysts say that Britain is likely to struggle to secure an unprecedented “permanent equivalence” deal for its financial services.

British authorities should be “under no illusion” on financial services in future relations with the EU after the Brexit transition period ends, EU chief negotiator Michel Barnier said on Tuesday.

In a speech to the European Parliament in Strasbourg, Barnier made it clear that equivalence regimes, which govern relations with foreign partners on specific financial sectors, would remain under tight EU control, with no special treatment for Britain.

Reporting by Olga Cotaga; Additional reporting by Tommy Reggiori Wilkes; Editing by Gareth Jones

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