LONDON (Reuters) - Sterling edged down on Wednesday after data showed Britain’s economy gathered only a little speed in the second quarter after almost stalling at the start of the year, pouring cold water on expectations for UK interest rate hikes in the coming months.
Growth of 0.3 percent on the quarter was up from 0.2 percent in the first three months of the year, in line with forecasts. But that figure is likely to cement expectations that the Bank of England will keep interest rates on hold next week at their record low level.
The pound had risen to its strongest levels in 10 months against the dollar in recent weeks, as a series of hawkish comments from BoE officials drove expectations that rates could be raised soon, perhaps before the end of the year.
The BoE’s 2017 growth forecast, however, was for 1.9 percent. Wednesday’s data suggests that the economy grew just 1 percent in the first half of the year on an annualised basis.
Sterling slipped to $1.3010 after the numbers, down from $1.3033 beforehand and leaving it down 0.1 percent on the day.
“The reason why a number even in line with expectations can be quite bearish (for sterling) is because it’s undershooting the Bank of England’s forecasts,” said BNP Paribas currency strategist Sam Lynton-Brown.
British government bond futures were little changed after the data, up 21 ticks on the day at 125.98, trading in line with German Bund futures.
Lynton-Brown added that the BoE may now start to rein in some of their hawkish language, which would be likely to weigh on both UK front-end yields and sterling. And he suggested the Bank’s hawkish tilt had been aimed at supporting the pound.
“They’ve been talking tough perhaps because they want to act soft – the language has been geared towards preventing the currency from weakening substantially further,” he said.
Against a broadly weaker euro, the pound was up 0.1 percent on the day at 89.28 pence. That was still less than a cent away from an eight-month low against the single currency plumbed last week.
Many analysts say sterling’s relative resiliency against the dollar in recent weeks is mainly down to weakness in the U.S. currency, which has struggled on a run of weak U.S. data as well as worries about political stability.
They also say that developments around Brexit will continue to be the main driver for the pound, which has fallen almost 14 percent against the dollar since last June’s referendum.
“The latest GDP figure comes in a week where the IMF have already revised UK growth forecasts for 2017 from 2 percent to 1.7 percent as ‘weaker-than-expected activity’ will have Brexit uncertainty written all over the IMF’s reasoning for the downgrade,” said Anthony Kurukgy, sales trader at Foenix Partners, a brokerage.
Additional reporting by David Milliken; Editing by Alison Williams