Sterling slips against dollar

Sterling slipped against the dollar on Thursday after data showed the UK goods trade deficit widened unexpectedly in May and the Bank of England kept interest rates at record lows. As expected, the central bank's Monetary Policy Committee (MPC) kept its benchmark interest rate at 0.5 percent, where it has remained since the worst of the financial crisis more than five years ago.
The MPC did not make a statement to accompany the rate decision, offering no insight into whether splits were beginning to emerge among the committee's nine members over when rates should start being hiked. Sterling hit a low of $1.7105 after the rate decision, before edging back up slightly to trade at $1.7124, down 0.2 percent on the day. Against the euro, the pound was broadly flat at 79.49 pence. The euro gave up earlier gains as worries about the Portuguese banking sector emerged and industrial data from Italy and France showed a steep decline in activity.
That should keep pressure on the European Central Bank to ease policy. In contrast, the BoE is broadly expected to hike rates either by the year's end or in early 2015, before the US Federal Reserve which on Wednesday detailed how it plans to make its own exit from the era of ultra-loose monetary policy.
Traders said they expected sterling to remain underpinned by the expectation that the BoE will increase interest rates before its peers in the developed world, despite a run of soft UK data this week which showed factory output slowing and the housing market starting to cool. "In an environment where investors are hungry for positive interest rate stories - and there aren't many of them around - that's quite a positive background for sterling," said Adam Cole, head of currency strategy at RBC Capital Markets.
The pound has gained over 15 percent against the dollar over the past year, hitting a nearly-six-year high against a basket of currencies last week. On Thursday major retail groups like Burberry and Associated British Foods cited strains caused by sterling's strength. Earlier the Office for National Statistics said the goods trade deficit grew to just over 9.2 billion pounds in May from 8.8 billion pounds in April. Economists in a Reuters poll had forecast a slight narrowing to 8.75 billion.
"Today's data is a little disappointing - the deficit is wider than expected. But if you look into the details, both imports and exports have increased," said Ian Stannard, a currency strategist at Morgan Stanley. "That does suggest increased activity in the UK, so that should limit the downside (for sterling), particularly in a currency environment where volatility is still very low and international liquidity is still ample."