LONDON: Sterling fell on Friday as weak Chinese economic data cooled appetite for perceived riskier currencies, although the Bank of England's signal this week that it would not cut interest rates was expected to help limit losses.
Bank of England governor Mervyn King on Wednesday damped expectations of a rate cut soon, arguing that such a move would damage some financial institutions and be "counter-productive", spurring a jump in the pound.
Sterling shed 0.3 percent to $1.5586 on Friday, having extended Wednesday's gains to reach a one-week high of $1.5686 on Thursday. The safe-haven dollar was higher against a basket of currencies, trading at 82.844.
"We are in an upchannel after reaching that low in late May, and the base of that would be $1.5530 - I'd be very worried that we'd fall further if we got below $1.5530," said Kathleen Brooks, research director at FOREX.com.
"But while we're getting jostled around by overall risk sentiment, while there are still expectations that maybe the Bank of England will remain on hold for longer than people think, I think we'll stay above that level in cable."
Sterling rose against the euro. The common currency was down 0.1 percent at 78.56 pence, dragged lower as European stocks went into reverse after a five-day winning streak on the back of the below-forecast Chinese data.
The euro has also been weighed down by waning investor optimism that the European Central Bank can take bold measures to stem the euro zone debt crisis and by economic data pointing to a sharp slowdown in the region. That is likely to bolster expectations the ECB will have to lower rates sooner rather than later.
RELIEF FROM BoE
Sterling has been falling against the dollar and the euro in recent weeks as the UK economic outlook has deteriorated and after BoE minutes showed policymakers debated a possible interest rate cut last month.
King's comments on rates, however, quashed expectations of a rate cut.
"We have been a little bit cautious in the short term but we're turning around a bit following Mervyn King's comments on Wednesday - particularly his comments regarding a rate cut have seen the market pare back some of its pricing for a rate cut in November," said Michael Sneyd, FX strategist at BNP Paribas.
British factory gate inflation eased to the slowest pace in nearly three years in July, data showed on Friday, indicating that price pressures in Britain are easing and supporting the BoE's view of a fall in consumer price inflation.
"We think that some of the decrease in consumer goods inflation, particularly the fall in energy, has consequently contributed to the faster-than-expected fall in headline inflation this year," Barclays said in a note.
"We now expect CPI inflation to be close to the BoE's 2 percent target in the second half of this year, with the main risk to our forecast being the re-emergence of a sharp upward trend in commodity prices."
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