LONDON (Reuters) - Sterling rebounded on Tuesday from early losses exacerbated by worse than expected UK GDP data, although analysts said its recovery was due to some end-of-quarter rebalancing rather than any improvement in sentiment.
Prime Minister Boris Johnson announced a plan to fast-track 5 billion pounds ($6.13 billion) of infrastructure investment and slash property planning rules to revive the UK economy but that had been expected and had little impact.
“Five billion sounds a lot but actually it’s quite a small amount really. It’s not a game-changer. The market hasn’t really reacted a great deal,” said Lee Hardman, a currency strategist at MUFG in London.
The pound was last up 0.5% against the dollar at $1.2362 and 0.7% versus the euro at 90.83 pence.
“Random is the word. I don’t think it has anything to do with the announcement of the government. We know that the announcement of infrastructure planning was going to come. I wouldn’t try and find an excuse. Maybe it’s been oversold. It could be that liquidity is poor today,” said Kenneth Broux, an analyst at Societe Generale.
Sterling’s moves at the end of the month or quarter are often unrelated to news and economic developments and more to do with investors rebalancing portfolios.
The pound has been under pressure recently from fears that Britain will fail to clinch a trade deal with the European Union by the end of 2020 deadline. Tuesday is the last day Britain can request an extension to the transition period, which it has already ruled out doing.
Britain and the EU remain far apart in negotiations on a new trading relationship and analysts at many banks say the risk of a no-deal Brexit at the end of the year is firmly back on the table.
Meanwhile Britain’s economy shrank by the most since 1979 in the first quarter of 2020 as households slashed their spending, according to official data that included the first few days of the coronavirus lockdown.
Gross domestic product dropped by a quarterly 2.2%, below the 2% median forecast in a Reuters poll of economists. Britain’s economy may have contracted by 20% in the first six months of this year, the Bank of England has warned.
Another worrying sign is the balance of payments deficit which widened to 21.1 billion pounds in the first quarter, versus a forecast of 15.4 billion pounds.
“The pound is on track to be the worst-performing G10 currency this month for the second consecutive month,” Hardman at MUFG said.
“The weakness we are seeing now is a trend that has been in place for some time.”
The pound has fallen 6.8% against the dollar this year.
UK Chancellor Rishi Sunak is expected to follow up the accelerated infrastructure spending plan with a budget statement next week.
“The economy was slowing even before the March lockdown, largely due to widespread flooding in February, which not only hit consumer spending, but also the wider economy in general,” CMC Markets analysts said in a note on Tuesday.
Investors remain wary of the risk of a second wave of coronavirus infections, after pubs, restaurants and bars are set to reopen from Saturday. The city of Leicester was put under lockdown again following a surge in new cases there.
($1 = 0.8157 pounds)
Reporting by Maiya Keidan; Additional reporting by Tommy Wilkes; Editing by Susan Fenton