Sterling slipped against the euro on Friday after stronger-than-expected German growth data reinforced the belief that eurozone interest rates would rise faster than the UK's, while the pound also trailed the dollar. Traders said the strong German and French numbers backed expectations that the European Central Bank will raise rates again before the Bank of England even starts, despite worries about eurozone peripheral debt, as the UK struggles with a patchy recovery.
The pound rose to a near seven-week high of 86.73 pence against the euro earlier in the week as worries over Greece pushed investors away from the shared currency. The Bank of England raised its inflation forecasts in its quarterly report on Wednesday which gave sterling an added boost.
But on Thursday, UK industrial output was unexpectedly weak while the National Institute of Economic and Social Research said economic growth slowed to 0.3 percent in the three months to April from 0.5 percent in the three months to March. "There were signs earlier in the week that sterling was being treated as a diversification trade away from the euro. The better eurozone GDP numbers today have seen some of that trade unwound," said Jane Foley, senior currency strategist at Rabobank.
The euro traded with gains of around 0.3 percent at 87.65 pence after rising to 87.99 in earlier dealing. Analysts expect eurozone interest rates to rise as soon as July, while markets are only fully pricing in a UK rate hike for the end of the year. "The strong German and French numbers reinforce a view that the ECB will signal a July rate hike next month," said Gavin Friend, currency analyst at nabCapital. Sterling also dipped 0.5 percent on the day to its lowest in over three weeks against the dollar at $1.6199 as dealers targeted stop-loss orders placed under Thursday's low. Further selling was also reported for the 1500 GMT London fixing.