LONDON: Sterling edged up against the euro on Friday after data showed Britain's economy is finally bigger than its pre-crisis size, highlighting the increasingly divergent economic and policy outlooks for the UK and the fragile euro zone.
Gross domestic product (GDP) expanded by 0.8 percent in the April-June period, the same strong pace as in the first three months of the year and in line with forecasts in a Reuters poll of economists.
The data came a day after the International Monetary Fund (IMF) cited Britain as a bright spot while it cut its forecast for total global economic growth in 2014. Earlier on Friday data showed German business sentiment falling for the third consecutive month, with the Ifo think-tank citing geopolitical tensions as affecting the business climate.
Germany has strong trade links with Russia and so could be affected by tougher sanctions on it.
That followed healthier German data on Thursday showing German business activity expanding more rapidly than expected in July, with the services sector growing at its fastest in three years.
That gave a boost to the euro, which had hit a 23-month low against the pound on Wednesday.
The euro fell to a day's low of 79.14 pence after the UK data and was last trading at 79.21 pence, down 0.1 percent on the day.
"The GDP report was bang in line with expectations, and as such it doesn't change the outlook policy significantly," said Adam Cole, G-10 head of currency strategy at RBC Capital Markets, who expects the Bank of England to hike interest rates by the end of the year.
Sterling pared some losses against the dollar after the data but was still down 0.1 percent on the day at $1.6975. The pound slipped below $1.70 on Thursday for the first time since June after weaker-than-expected retail sales numbers cast some doubt on the case for a swift rise in interest rates.
Although the British economy has looked to be recovering strongly this year, June's retail sales added to a run of slightly weaker data. Significantly, wage growth - a key issue for central banks considering raising interest rates - was shown earlier in the month to be lagging inflation. "We are starting to see a few more sell sterling recommendations emerge on the back of a view that the tightening cycle is fully priced," said ING analysts in a research note.
"In practice, however, the SONIA (Sterling Overnight Index Average) curve sees the first 25 basis point rate hike priced in February next year and another in May."
British gilt futures crept lower after the GDP data. They were last 2 ticks lower at 110.75, having stood around 110.82 right before the release.
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