LONDON (Reuters) - Sterling fell on Wednesday after data showed UK business investment fell in the fourth quarter of 2016 and indicated tougher economic times lie ahead, despite overall growth hitting its fastest pace for a year.
Business investment fell 1 percent in the last three months of the year compared with the previous quarter, after two straight quarters of improvement. Household spending growth also slowed and, separately, data showed the services sector expanded in December at the slowest pace for seven months.
So, after initially climbing on a pick-up in UK growth - gross domestic product rose 0.7 percent in the fourth quarter compared with the previous three months - sterling quickly reversed its course to trade down 0.1 percent on the day, hovering around $1.2460 by 1655 GMT.
“The biggest disappointment was the business investment component, which was much weaker than anticipated,” Credit Agricole’s head of FX strategy, Valentin Marinov, said.
Sterling did a similar about-turn against the euro. As the single currency took a dip over worries around France’s upcoming presidential election, the pound hit a two-month high of 84.03 pence in early trading. But it changed direction after the data, and was trading 0.3 percent lower at 84.73 pence per euro by the late afternoon.
“There may well be a case to say investors are still looking for the weaker aspect of data and focusing on that – the Brexit trade is an easy one to hang on now, as is the euro political risk trade ... over the last couple of days,” BMO Capital Markets currency strategist Stephen Gallo said.
Other strategists, however, such as MUFG’s Lee Hardman, said sterling already has a lot of bad news priced into its exchange rate, having shed almost 17 percent since last year’s Brexit vote. Therefore, they argue, the pound is likely to perform better than usual on signs of economic weakness or of dovishness from the Bank of England (BoE).
BoE Governor Mark Carney was challenged by lawmakers on Tuesday over the central bank’s decision to alter a fundamental assumption that helps it to justify keeping interest rates at a record low.
The BoE said this month that it believed Britain’s unemployment rate could fall to 4.5 percent - down from a previous estimate of 5 percent - before it starts to push up inflation, which could help the central bank keep rates at their all-time lows for longer.
Traders are now awaiting the minutes of the latest meeting of U.S. Federal Reserve policymakers due out at 1900 GMT, which could throw light on the likelihood of a U.S. interest rate rise in March. Markets have priced in only a slim chance of a rise next month but a much greater likelihood by June.
Editing by Louise Ireland
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