LONDON (Reuters) - The pound rallied on Friday to a two-day high after a better-than-expected revision to Britain’s first-quarter economic growth raised hopes of monetary policy tightening in the coming months.
Adding to the bounce, the European Union’s chief negotiator Michel Barnier said that EU leaders had made progress in Brexit talks, though “huge” differences remained.
The British economy grew 0.2 percent in the January to March quarter, against a preliminary number of 0.1 percent, providing some ammunition to a hawkish Bank of England.
The data also showed Britain’s services sector gathered steam in April, raising expectations of a second-quarter pick-up after a sluggish start to 2018 that has stopped the Bank of England raising interest rates so far this year.
“You could argue that the fact the GDP number is stronger plays into the hand of the Bank of England hawks,” said Jane Foley, an analyst at Rabobank. “That said, it still a weak figure. The room for celebration could be limited unless we get strong data for Q2.”
Market expectations for an August rate rise grew to 60 percent after Friday’s data release from 50 percent earlier this week.
With momentum in Britain’s economy still fragile and uncertainty over Britain’s future relationship with the European Union, most traders remain cautious about the prospect of rate hikes and the pound.
The EU issued British Prime Minister Theresa May a final Brexit warning on Friday - put your cards on the table, offer ways to overcome “huge” differences and prevent Britain from crashing out of the bloc without a deal.
But expectations of progress towards an actual post-departure deal have now been pushed back to October.
The British economy performed relatively poorly in the first quarter after cold weather hit retail demand and the construction industry.
After a bruising week and month for sterling as worries about the lack of progress in Brexit talks and weakness in the British economy hit the currency, the pound rallied to $1.3153 on Friday, up 0.6 percent on the day.
Before the data it was trading at $1.3114, off the 7-1/2 month lows of $1.3050 hit earlier this week.
Against a euro buoyed by European Union leaders agreeing a deal on migration, the pound recovered its earlier losses and traded flat at 88.425 pence per euro.
British gilt futures fell 26 ticks to 122.74 after the data.
Reporting by Tommy Wilkes; additional reporting by Alistair Smout; Editing by Mark Heinrich