Sterling fell against the dollar and the euro on Friday, weighed down by uncertainty over the outlook for the UK economy, with market players recommending selling into rallies in the currency. Traders said sterling had been supported earlier in the day by corporate dividend demand but gains were limited, particularly as many investors were taking profits ahead of the weekend on sterling's gains versus the euro earlier in the week.
"Some of the weakness in the euro against the pound earlier in the week is being reversed now," said Michael Derks, chief strategist at FXPro. "The weak UK trade data was not helpful for sterling," he added. Sterling was knocked by data on Thursday showing Britain posted a record high trade deficit in July. Analysts said weaker-than-expected producer prices data on Friday also increased the chances that the Bank of England would hold off from raising interest rates until well into 2011.
At 1530 GMT, the euro was up 0.6 percent at 82.73 pence, well above a low of 82.02 pence hit earlier in the week. Traders said offers around 82.60/70 pence were helping to cap gains, however. Against the dollar, sterling was 0.2 percent lower at $1.5398, off an earlier high of $1.5468 to take it close to its 200-day moving average, currently at $1.5395.
"The UK trade numbers were disappointing and PMIs (purchasing managers' indexes) last week pointed to momentum being lost. The question marks over the UK recovery continue to swell," said Jeremy Stretch, currency strategist at CIBC. "I'd look to sell rallies in cable unless it breaks above $1.5480," he said. Figures showed the UK's trade deficit expanded to a record 8.667 billion pounds in July from 7.532 billion in June, casting doubt over whether external demand will help drive growth once planned government spending cuts begin.
Britain's austerity measures were back in focus with finance minister George Osborne planning an extra 4 billion pounds of welfare cuts on top of already announced plans to cut the annual bill by 11 billion pounds, the BBC reported on Thursday. Osborne said he would detail the exact cuts in October's spending review, which will also explain how the government plans to implement previously announced 25 percent cuts in many government departments' budgets.