The British pound rose against the dollar and euro on Thursday as investors shrugged off official data revealing a record shortfall in the United Kingdom’s current account deficit in early 2022.
At 0837 GMT the pound was up 0.2% against the dollar at $1.21485 and the British unit also strengthened against a weaker euro, rising 0.2% to 85.970 pence.
But as British central bankers grapple with the task of taming inflation while avoiding a severe economic downturn, the currency remains on course for its biggest six-month drop against the US dollar since 2016, the year of the Brexit referendum.
“As far as the UK is concerned there are so many economic headwinds; very low savings buffers by households, no meaningful fiscal support and you have the current account balance deficit expected to double this year,” said Vasileios Gkionakis, head of currency strategy at Citi.
Data on Thursday showed Britain racking up a record shortfall in its current account in the first three months of this year, as the deficit ballooned to 51.7 billion pounds ($62.8 billion) or 8.3% of gross domestic product.
The BoE has hiked interest rates five times since December and its next scheduled rates announcement is on Aug. 4, with some market players expecting a bigger hike of 50 bps at the next meeting. Inflation hit a 40-year record of 9.1% last month, the highest level of the G7 countries.
But expectations of a bigger hike were tempered on Wednesday after Bank of England Governor Andrew Bailey struck a softer tone, saying the central bank will not necessarily have to act “forcefully” to get inflation under control.
Bailey’s dovishness was echoed by incoming BoE policymaker Swati Dhingra who called for a very gradual tightening in light of a quicker than expected economic slowdown.
“The market has moved to the possibility of pricing in a 50 bps rate hike, but it remains a very close call,” said Gkionakis.
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