Sterling steadies after UK economy posts fragile Q1 growth

The pound steadied on Friday after data showed the UK economy avoided recession in the first quarter, recovering from its biggest one-day drop since mid-April the previous day.

Sterling was last up 0.1% against the dollar at $1.252. It fell nearly 1% on Thursday after the Bank of England raised interest rates and said it would stay the course.

But with consumer inflation running at 10.1%, investors had long prepared for a more aggressive stance from the BoE, whose move gave no new incentive to actively buy the pound, but also few to sell it.

“The Bank of England’s 25-basis point rate hike did not have any major implications for sterling. The drop in cable yesterday was almost entirely due to the dollar rally and was in line with the move in other dollar crosses,” ING strategist Francesco Pesole said.

He said there was a case for more sterling weakness ahead, but this would most likely materialise in the euro/sterling rate, which on Friday was down 0.14% at 87.12 pence, as expectations for where UK and euro zone rates converge.

“For now, however, there aren’t many convincing reasons to call for sterling underperformance against its main peers in the near term,” he said.

The BoE upgraded its economic growth forecasts and said Britain would avoid a recession. Data on Friday showed growth expanded by 0.1% in the first quarter, but contracted in March, which analysts said showed the fragility of the recovery.

Not only does the UK have the highest rate of inflation of any developed economy, it also has the slowest rate of growth among the Group of Seven richest nations.