Sterling surged by more than 1 percent to a two-week high against the dollar on Thursday, after data showed Britain's economy growing in line with expectations, and as investors' appetite for risk made a modest recovery. A Reuters report that the European Union is offering Britain a new "emergency brake" rule that could help curb immigration from other EU states boosted the pound further later in the day, briefly taking it past $1.44.
Worries about a referendum on Britain's EU membership, expected some time this year, have weighed on sterling in recent months. Sterling later eased back to $1.4374, but that still left it up 1 percent on the day. "There's a pretty decent risk environment today, and so we're getting a bit of a reversal of some of the downward momentum we've had over the last few weeks," said ING currency strategist Viraj Patel. "But I think this is a tentative move, not a fundamental one."
Data released early on Thursday showed fourth-quarter UK gross domestic product grew by 0.5 percent, up slightly from 0.4 percent in the three months to September, the Office for National Statistics said on Thursday. This was in line with economists' forecasts. That kept alive expectations that the next move by the Bank of England will be a rate hike. In contrast, the European Central Bank is likely to expand its monetary stimulus programme in March, a factor that should keep the euro capped.
Against the euro, sterling gained half a percent to 76.18 pence. Credit Agricole currency strategist Manuel Oliveri said the data had provided sterling with something of a relief rally. "The data was not too negative to impact rate expectations. Overall we believe the economy is doing pretty OK, as are inflation expectations, all of which should not see the BoE be too dovish," he said.
Sterling had hit a seven-year low of $1.4080 last week and has shed around 5.3 percent since the start of December, on a combination of concerns over a possible "Brexit" from the EU and fading expectations for higher UK rates. Currently, investors are pricing in a chance of a rate hike in the second half of 2017, having pushed back their bets on late 2016 in the past few weeks.