LONDON: Sterling rose 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 business activity in Europe's largest economy 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. But the euro fell to 79.10 pence on Friday, down 0.2 percent on the day and on track for its second straight week of losses.
QE FOR EUROZONE?
"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.
In contrast, the European Central Bank is likely to maintain loose monetary conditions and many expect it to opt for quantitative easing later this year.
QE is seen as negative as it increases the currency's supply and drives down its value. Sterling pared some losses against the dollar after the data and was flat on the day at $1.6985.
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 UK 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.
"It (the GDP data) doesn't do too much for rate hike expectations though, with some investors recently pushing back their calls for a rate hike to first-quarter 2015," said Alex Edwards, head of corporate desk at UKForex.
"The headlines indicate that all is rosy again but it isn't quite, with average earnings struggling to keep pace with the improving jobs numbers. It indicates that there is still quite a lot of slack in the economy."
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