LONDON: Sterling weakened against a rising dollar on Wednesday after prepared remarks from U.S. Federal Reserve Chair Janet Yellen suggested that interest rate hikes in coming months remain a possibility.
Yellen said there are good reasons to believe the United States will stay on a path of moderate growth that will allow the Fed to pursue "gradual" adjustments to monetary policy.
Earlier, sterling proved resilient to a poor batch of British industrial output data, rising to a day's high of $1.4576 before retreating in afternoon trade in London to trade at $1.4455, down 0.1 percent on the day.
It was also hurt at the margins by an estimate that showed Britain's growth slowed in the three months to January. NIESR estimated that the British economy grew at a quarterly rate of 0.4 percent in the three months to January, down from 0.5 percent in the last three months of 2015.
"The GDP estimate burdens Bank of England Governor Mark Carney with yet more bad news, after poor industrial production results this morning," said Dennis de Jong, managing director at UFX.com. "It will be very interesting to see whether the figures can bounce back next quarter."
Nevertheless, sterling outperformed the euro, with the single currency under pressure as global stock markets recovered. The euro usually gains during times of financial market stress given that it is a low-yielding currency.
The pound rose 0.8 percent to trade at 77.45 pence per euro. , having dropped to a more than one-year low earlier this week amid a wave of global concern over banks and other financial firms which has hammered stock markets.
Traders also expect uncertainty stemming from a looming referendum on whether Britain wants to stay in the European Union or not to keep the pound choppy in the coming months and possibly force the central bank to keep rates lower for longer.
Most economists think leaving the EU would hurt British growth in the short-run and interest rate markets are not pricing in a rate hike until 2020. Sterling overnight interbank average rates - the very short-term interest rates which form the basis of lending costs to the economy - were pricing in the chance of the first rate hike in four years time.
In a note on Wednesday, Nomura said sterling could fall over 10-15 percent if Britain exited the EU.
"Brexit (leaving the EU) is the fuel for a recessionary fire," they said in a note. "An unwillingness of external investors to finance the current account on current terms could cause a collapse in the currency of 10-15 percent over several months."
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