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Sterling hits 11-day high as dollar drops on weak U.S. GDP data
July 29, 2016 / 8:56 AM / a year ago

Sterling hits 11-day high as dollar drops on weak U.S. GDP data

LONDON (Reuters) - Sterling gained more than 1 percent on Friday to trade above $1.33 for the first time in eleven days, as the greenback dropped sharply across the board after U.S. economic growth data came in much weaker than expected.

Wads of British Pound Sterling banknotes are stacked in piles at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013. REUTERS/Leonhard Foeger/File Photo

Since plunging 14 percent within hours after Britain’s shock vote to leave the European Union five weeks ago, the pound has recovered about 4 percent, proving much more resilient than most major banks had forecast. Derivatives market indications of its future value are now far more balanced.

That is despite a raft of data suggesting that confidence in the economy has fallen sharply in the wake of the Brexit vote and that Britain could be heading for a recession.

The latest - figures showing British consumer morale suffered its sharpest drop for more than 26 years in July - had little impact on the currency on Friday.

But strategists said that sterling will be vulnerable in the coming week - the Bank of England (BoE) starts a two-day policy meeting on Wednesday and is expected to cut interest rates for the first time since 2009.

Almost all analysts polled by Reuters believe the bank will cut rates by a quarter point from the current record low of 0.5 percent. A slim majority believe the BoE will hold off from announcing more quantitative easing (QE) for now, but many think that will be part of a stimulus package.

“Near-term, sterling/dollar has not yet fully discounted the BoE easing, unlike interest rates,” Societe Generale analyst Olivier Korber said. “The Brexit economic shock and worrying external balances should continue to weigh on sterling over the medium term. We forecast (sterling) to fall below $1.30 by September.”

It rose more than 1 percent on Friday to $1.3302, its highest since July 18. Against the euro, which was also stronger on the back of the U.S. numbers, the pound inched up 0.1 percent to 84.10 pence, having hit a 2-1/2-week low against the single currency.

“All the confidence surveys have been dire, but they’ve already been priced in. So we need something new now, and that is probably the Bank of England response,” ING currency strategist Chris Turner said.

“We think they will go large and early, and sterling will weaken to $1.27-1.28 towards the end of next week on the back of that,” he said, noting that he expected a 25-basis-point rate cut as well as a new round of QE.

Editing by Louise Ireland

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