Sterling jumped to a six-week high against a broadly weaker dollar on Tuesday after data showed the UK economy grew by 0.2 percent in the second quarter, confounding some speculators who had positioned for a weaker number. Sterling's gains were aided by a slump in the dollar as US lawmakers remained deadlocked in talks over raising the debt ceiling only a week before a deadline to act.
UK growth was tepid but the number was met with relief by the market as some investors had positioned for something weaker, with traders saying talk had been circulating ahead of the release that the data could show a contraction. Sentiment towards the pound was also helped as the UK statistics office said quarterly growth could have been as high as 0.7 percent but for one-off effects including an extra public holiday in April.
But analysts said near-term gains in the pound may be limited due to concerns that weak growth will hamper the government's efforts to bring down debt as well as keep interest rates at record low levels for a prolonged period. The pound rose to $1.6414, its strongest since mid-June, before dipping back to $1.6380 in afternoon trade as traders cited an Asian sovereign account selling into the rally. Further gains would see it target the June 14 high of $1.6443 and the June 7 peak of $1.6474. The pound also trimmed losses against the euro, which traded close to flat for the day at 88.34 pence, well below an earlier two-week high of 88.83 pence.