Sterling fell to a two-week low against the euro on Friday, after data showed the UK economy's fall in the first quarter was its fastest in 30 years, casting doubt on the government's economic outlook. The UK currency later pared some of those losses, recovering against the dollar due to general short covering from its fall on the data and overseas central banks buying the currency for their regular reserves management needs, traders said.
Britain's first-quarter gross domestic product fell 4.1 percent year-on-year, the biggest annual drop since the end of 1980. Analysts had expected a 3.8 percent contraction. Such a weak GDP reading overshadowed better-than-expected retail sales data for March.
Sterling also came under pressure early on Friday after The Telegraph newspaper reported that ratings agencies were concerned about Britain's rising debt levels. The government earlier in the week said that the national debt would reach 1.4 trillion pounds in the next five years. "There's a lot weighing on sterling, not least the budget and fallout from concerns about the amount of gilt issuance," said David Tinsley, economist at National Australia Bank in London.
The Telegraph quoted a Moody's analyst saying the Treasury's projection for high public sector borrowing was "cause for concern", but the ratings agency on Friday said it was not reviewing its AAA rating on UK sovereign debt. At 1500 GMT, the euro traded 0.9 percent higher at 90.05 pence, pulling back from 90.82 pence hit according to Reuters data, its highest since April 9, after the UK data.
The euro posted broad gains after the Ifo institute's index of the German business climate rose more than expected in April to 83.7, up from a revised 82.2 in March. So far on the week, the euro is up around 2 percent against the pound.
Sterling was slightly lower on the day, having recovered from a tumble to $1.4576. The pound has fallen around half a percent against the dollar so far this week, but on the month, it has gained nearly 3 percent thus far, its strongest rise in percentage terms since late 2006. In addition to buying flows related to overseas central banks, traders said that market participants had taken profits from sterling's fall, which was helping to retrace some losses.
"The market tried to take it below $1.46 and failed to keep it there," said a trader in London. "Also euro/sterling has good support around the 90 pence level." Sterling's broad losses pushed it down to as low as 77.5 against a basket of currencies, its lowest since the beginning of the month.