Sterling fell half a percent to a three-month low against the broadly stronger dollar on Friday, hurt by recent upbeat US data which contrasted with a worsening UK economic outlook. Investors piled into dollars this week in the wake of strong US reports on jobs and retail sales, and an unexpected narrowing in the US trade deficit. Meanwhile, a dovish inflation report from the Bank of England and weak UK manufacturing and retail sales releases have driven UK interest rate markets to price in a small chance of a rate cut this year.
"We have seen a softness in the UK data this week which has caused markets to revise their outlook for UK interest rates, and we have had some strong reports from the US," said Geraldine Concagh, economist at AIB Group Treasury in Dublin. "That has seen sterling come under pressure."
Sterling fell half a percent against the dollar to $1.8529, its worst showing since mid-February. A break below $1.8506 would take the currency to 2005 lows, in line with similar falls in euro/dollar.
The pound was at 68.13 pence per euro at 1415 GMT, down a quarter percent from the US close.
In a heavy schedule for UK data next week, markets will be watching April inflation data on Tuesday, minutes of the Bank of England's May policy meeting on Wednesday, and April retail sales on Thursday.
Markets are starting to speculate that the next move in UK interest rates will be a cut, after five rate rises between November 2003 and August 2004, to the current 4.75 percent.
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