Sterling sank by a full cent against the dollar on Wednesday after a survey of the British service sector came in sharply below forecasts, pointing to another subdued round of overall economic growth in the second quarter. The slowdown from April in the single biggest piece of Britain's economy was the fastest in nearly four years and, combined with a weak manufacturing survey and a bounce in construction, suggested growth across the three sectors combined in May was the lowest since December.
The pound fell to $1.5263 from $1.5357 in response before gaining a foothold. It also weakened to 72.97 pence per euro from 72.57 pence before the numbers. "The size of the drop was a little bit surprising and the pound has reacted to that," said Stephen Gallo, European Head of FX Strategy at BMO in London. "We are still pretty upbeat on sterling. The details of the report suggest that services, housing and consumption are all still doing pretty well. I don't like sterling much below $1.50 but I also don't think I'd necessarily be buying it here."
British government bond futures briefly pared losses by around 10 ticks, before returning to their level before the data, down around 30 ticks on the day. Britain's benchmark FTSE 100 equity index remained flat at 6,930 points. There are broader question marks over growth ahead. The euro zone is still struggling to pull out of five years of debt-driven turmoil, Britain's newly-elected Conservative government has promised sharp cuts in public spending to reduce the budget deficit, and outside investors may be given pause for thought by a planned referendum on Britain's membership of the European Union.
That, and a dip in growth in the first quarter, has pushed back expectations for a first rise in UK interest rates well into next year, weakening the case for the pound to be one of a few currencies to appreciate in broader terms along with the dollar. The Bank of England starts a two-day meeting on interest rates on Wednesday but is expected to add nothing to the debate for now. After a brief jump following the elections on May 7, the pound is now bang in the middle of this year's ranges and around 6 cents above lows against the dollar hit in March and April. "The effects of the general election now seem to have worn off and investors now show no hesitation selling the pound on the back of any weak data," said Alex Edwards, head of the corporate desk at online broker UKForex.