LONDON: Sterling fell against the dollar on Friday after revised UK GDP figures pointed to a shallower recession in line with expectations, wrongfooting some market players who had expected an even smaller downturn.
The gross domestic product figures showed the UK economy contracted 0.5 percent in the second quarter, slightly better than an initial reading of a 0.7 percent contraction.
But this had already been largely priced in by investors, and analysts said the overall report was far from encouraging, especially since it pointed to weakening exports, a fall in investments and sluggish consumer spending.
Those factors were expected to weigh on the UK economy and keep alive the risk of further quantitative easing by the Bank of England. More QE is considered bad for the currency as it increases the supply of pounds.
"The GDP revision does not fix anything. The number was slightly better but still ultimately bad news and you have to wonder if the UK's triple-A rating will come under threat," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec.
"If that happens the pound could be in for a bad time."
The pound fell 0.2 percent on the day to $1.5826, retreating from a three-month high of $1.5912 hit on Thursday. Traders said strong sterling bids from Asian central banks helped limit losses.
The euro climbed to a two-week high of 79.28 pence after the data was released. It later gave up those gains to trade down 0.3 percent at 78.99 pence as it tracked losses in the euro against the dollar.
FED MINUTES SUPPORT STERLING
Despite the latest dip, the pound is on track for its best weekly gains since mid-June after the minutes from the Fed's last meeting raised expectations that US policymakers could deliver another round of quantitative easing soon.
In contrast to the Fed, the Bank of England is expected to keep monetary policy largely unchanged at least until towards the end of the year.
"The breakdown of the GDP report isn't encouraging at all," said Jane Foley, senior currency strategist at Rabobank.
"There is a structural worsening of the UK economy. But we are also expecting the Fed to act in the near term and that should weigh on the dollar and support cable."
Strategists at ING said sterling looked like a good buy around $1.5830/50 and could push higher towards $1.60 as the Fed minutes had set the tone for a softer dollar in the coming two to three weeks.
Chartists said resistance lay around $1.5910, the 61.8 retracement of the late April to early June fall from above $1.63 to around $1.5270. A clear break of that level could see sterling rise to test $1.60, they said.
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