Sterling fell to its lowest against the dollar in more than a month on Friday, erasing earlier gains made after data confirmed the British economy grew at a good pace in the second quarter. Sterling rose to $1.5427 immediately after the data from $1.5400 beforehand. Then month-end outflows pulled it down to $1.5348 in afternoon trade, its lowest since early July. It was on track for its biggest weekly loss against the dollar since March.
The pound was also weaker against the euro, with the single currency up 0.3 percent at 73.25 pence. The Office for National Statistics said UK gross domestic product grew by 0.7 percent in the second quarter of this year, confirming a preliminary reading, as expected. Business investment rose 2.9 percent on the quarter, the highest in a year. Net trade boosted gross domestic product by 1.0 percentage point on the quarter, the biggest contribution from trade in four years, as exports jumped.
Even so, money markets are not pricing in a chance of a rate hike by the Bank of England before the second quarter of 2016, compared with early 2016 just before the central bank's inflation report was released earlier this month. "The economy continues to perform well, with the exception of inflation, but current turmoil in global markets means the voting pattern in the (BoE's) Monetary Policy Committee is unlikely to shift to more than one member voting for a hike in the next meeting," said Alex Lydall, a senior sales trader at Foenix Partners, which offers hedging solutions to companies.
Focus has now turned to an annual conference in Jackson Hole, Wyoming, attended by many of the world's top central bankers. BoE Governor Mark Carney is a panellist at the symposium on Saturday where global inflation dynamics will be discussed. Earlier this month, Carney indicated a decision to raise rates could come at the turn of the year, but investors will be keen to hear the BoE's take on recent events and whether it changes the monetary policy outlook for now.
Morgan Stanley analysts said in a note said they had turned bearish on the pound after the bank's economists highlighted the potential of more slack in the UK economy than previously assumed. Record-high net migration numbers in the year to March would keep wages subdued, they said. "Hence, with rate hike expectations getting pushed back and the potential for the Brexit debate to resurface, we look for sterling to come under renewed pressure and have added a sell recommendation to our portfolio," the analysts said.
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