Sterling retreats from 5-1/2 year high on wider UK fiscal deficit

LONDON: Sterling retreated from a 5-1/2 year high against a basket of currencies on Thursday after UK data showed a bigger-than-expected fiscal deficit, prompting some investors to take profits in the pound's recent rally.

Sterling fell to a day's low of $1.6862 after the data was released from around $1.6909 beforehand. The euro pulled further away from a 17-month low of 80.85 pence , to trade at 81.11 pence, up 0.1 percent on the day.

Better-than-expected British data and indications that some members of the Bank of England's (BoE) monetary policy committee are veering towards an interest rate hike saw the pound hit its highest since late 2008 against a trade-weighted basket of currencies on Wednesday.

The index was down 0.2 percent at 87.1 on Thursday, data from the BoE showed. It is still up 2.5 percent on the year.

Separately published data on Thursday confirmed UK gross domestic product (GDP) between January and March grew by 0.8 percent compared to the last three months of 2013.

"While a second estimate of UK's GDP printed in line with expectations, it was the weak public sector borrowing data that took markets by surprise," said Alex Edwards, head of corporate desk at UKForex.

"Investors were heavily buying sterling/dollar heading into the release, and so the surprise number was a good excuse to trim these positions."

Sterling had surged on Wednesday after a sharp rise in retail sales last month. Minutes from the BoE latest meeting also showed some policymakers were leaning towards a rise in interest rates on the back of robust data.

The sterling overnight interbank average (SONIA) curve showed investors pricing in a chance of a rate rise in 9 months' time.

That would make it the first major central bank to tighten policy and increase the pound's premium over its peers in Europe and the United States.

The European Central Bank is likely to ease policy next month. And while the Federal Reserve is reining its policy of money-printing, a rise in interest rates is still sometime away.

"We expect the pound to start regaining support. We expect this to remain evident on many of the crosses initially, with euro/sterling likely to continue to push lower, targeting the 80.30/80.00 area initially," Morgan Stanley said in a note.