LONDON: Sterling was steady on Thursday, retaining solid gains made the previous day after the Bank of England played down the possibility of an interest rate cut, though concern about a weak UK economy checked gains.
Sterling was flat on the day at $1.5640, having earlier extended Wednesday's gains to reach a one-week high of $1.5686. It rose against the euro.
The euro was down 0.3 percent at 78.705 pence, as the common currency came under broad pressure as some of the optimism that policymakers will take bold action to solve the debt crisis waned. Bids were cited at 78.60 pence.
The British pound jumped on Wednesday after BoE chief Mervyn King dampened what had been growing expectations of an interest rate cut, arguing that such a move would damage some financial institutions and be "counter-productive".
This prompted market players to trim bets on a weaker pound but analysts expected the positive effect of this to be short-lived, with a string of recent weak economic data keeping alive the prospect of more monetary easing.
The comments came as the BoE presented its quarterly Inflation Report in which it forecast the economy would barely grow this year and cut its projections for growth and inflation.
"The feeling is that the pound is not so fashionable any more. The Inflation Report underpinned what seems to be a growing line of UK negative data," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec.
Britain's total goods and services trade deficit hit a record high in June, after a sharp drop in goods exports, confirming the bleak picture painted by an early estimate last month of second-quarter gross domestic product.
Figures last month showed the UK economy shrank by 0.7 percent in the second quarter of 2012, marking its third consecutive quarter of contraction, and surveys since then have pointed to a poor start to the second half of the year.
The BoE and analysts say there is little room for optimism as the euro zone, Britain's biggest trading partner, is also headed towards a sharp slowdown. That is likely to keep the pound under pressure.
Investors are also increasingly concerned that the deeper the UK slides into recession, the more difficult it will be for the government to achieve targets for reducing its hefty fiscal deficit. That could see Britain lose its prized triple-A credit rating and hit safe-haven inflows that have supported the pound.
"Net pound-flows have turned sharply negative since the start of the month according to BNY Mellon iFlow data," Neal Mellor, currency strategist at Bank of New York Mellon wrote in a note. He expects the pound to struggle against the dollar.
"It is hard not to see the flattening in fixed income inflows since mid-June without inferring that investors may have begun to have at least some doubts about the merits of the UK's haven status, and the value of gilts at their current levels."
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