LONDON (Reuters) - The pound gave up early gains on Friday after UK retail sales data came in weaker than expected, prompting investors to price in a greater chance interest rates would be cut at the end of this month.
Sterling rose to a six-day high before investors resumed selling the currency, in a week dominated by dismal data and dovish comments from policymakers.
Several Bank of England policymakers, including outgoing Governor Mark Carney, signalled this week that a rate cut was likely unless economic data improved.
Economic data showed further weakness on Friday, with British consumers failing to increase their spending in December for a record fifth straight month.
“The lack of inflationary pressure could easily persuade the Bank of England that the time is right to inject some zip into the economy with a rate cut, and sterling is likely to recalibrate accordingly,” said Ayush Ansal, chief investment officer at Crimson Black Capital.
Weak inflation readings came in on Wednesday and weak growth numbers on Monday, including slower industrial and manufacturing production. That has raised the likelihood of a quarter-point rate cut in January to nearly 70%, according to Refinitiv data.
Sterling was last down 0.4% at $1.3028, though more stable against the euro at 85.14 pence.
However, the British currency held up strongly compared with where it was trading earlier in the week, when it fell to a three-week low of $1.2955 even though markets were not expecting a rate cut.
Investors now believe Britain and the European Union are more likely to partly agree on a trade deal after Britain quits the EU on Jan. 31, avoiding an abrupt, disorderly departure at the end of this year.
After Prime Minister Boris Johnson said that a trade deal was very likely by the end of 2020 — when the transition period ends — a consensus grew that the two sides would agree on a deal on goods this year and postpone one on services into next year.
An agreement on goods would be easier to achieve, since the EU is a big exporter to the UK, analysts said.
“After more pragmatic and more balanced comments from both sides, the market has started to realise that this is a more likely scenario,” said Athanasios Vamvakidis, global head of G10 forex strategy at Bank of America.
Real money investors have remained long sterling and hedge funds have stayed neutral, which has helped keep the pound above $1.30, Vamvakidis said. He does not see sterling falling below $1.30 unless the BoE does ease cut rates in a couple of weeks.
Reporting by Olga Cotaga; Editing by Kevin Liffey and Pravin Char