Sterling dipped against the dollar on Thursday, giving up earlier gains despite robust UK economic data, as some investors trimmed positions on growing expectations of more easing by the Bank of England. Traders also cited a Sky News report that ratings agency Moody's is set to downgrade major world banks, including UK lenders, as weighing on the pound.
Sterling fell 0.3 percent to $1.5665, near a session low of $1.5655, and well beneath a one-month peak of $1.5778 hit on Wednesday. It was on track for a second straight day of losses against the dollar. It outperformed the euro, though, with the single currency down 0.2 percent against sterling at 80.64 pence.
While British retail sales saw a surprise rebound in May, and UK factory orders an unexpected improvement in June, this did little to sway some from a downbeat view on the UK economy, which supports a case for the BoE to increase its asset purchase programme. More quantitative easing is usually considered bearish for the currency as it increases the supply of pounds in the system.
"I think the Bank of England is going to ease, that's now very clear, so to me there's no compelling (reason) for sterling to outperform," said George Saravelos, FX strategist at Deutsche Bank. "I think euro/sterling will base around current levels, and as a result, sterling versus the dollar will just follow the broader euro/dollar move. Given that we are not too bullish euros, I'm not really bullish sterling."
Analysts cautioned against seeing the retail sales data in too positive a light, given they were distorted by sunny weather conditions, and highlighted that the picture for household spending remains grim. The central bank stands ready to inject more money into the economy, with minutes to its June policy meeting showing far stronger support for more quantitative easing than many economists had expected. BoE governor Mervyn King said in a keynote speech last week that the euro zone, the UK's biggest trading partner, was casting a "black cloud" over the UK economy, making a case for more QE.