Sterling stayed within touching distance of six-year-highs against the dollar on Friday after data indicated the UK recovery is gathering steam, keeping alive expectations of a rate hike this year. The data showed the fastest expansion in UK business investment in two years in the first quarter, while gross domestic product (GDP) grew at 3 percent on an annualised basis, in line with expectations and the strongest since 2007.
Sterling was broadly flat, trading at $1.7029 against the dollar and on track for its fourth straight week of gains. The euro was flat at 79.98 pence. Earlier, Bank of England Governor Mark Carney warned that the economy was still vulnerable and that interest rates were unlikely to return to levels of around 5 percent seen as normal before the financial crisis. Instead, lower rates around 2.5 percent would become the "new normal".
But that did little to curb the expectation that the BoE will be the first of the five major central banks to raise interest rates from their current historic lows. "In terms of gauging sterling prospects, the focus should remain on the underlying UK economy, which looks to be in good shape, judging by the data over recent months," said Peter Krpata, a currency strategist at Dutch bank ING.
"Our economists now see November as the most likely time for a rate hike, provided that wage growth starts picking up." The latest data follows measures announced on Thursday in the BoE's latest financial stability report to cool the UK's booming housing market, which some fear may be approaching bubble territory. In a news conference following the report Carney said the macroprudential measures would not affect the central bank's decision on interest rates and that it was not the job of a central bank to control house prices.
Traders said that $1.70 is a psychologically important level and that sterling was starting to look like it would stay above that price and perhaps push higher in the coming weeks. "On the technical charts there tends to be a bit of a vacuum between $1.70 and $1.80," said Neil Mellor, a currency strategist at Bank of New York Mellon. "If it is capable of getting very comfortable above $1.70, it means those betting it wouldn't be able to break through will capitulate and start buying sterling. And that means that it could move very quickly if they've been defending specific levels in the market."
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