LONDON, May 23 (Reuters) - Sterling failed to sustain an early push higher against a broadly weaker dollar and lost ground versus the euro on Friday as investors focused on an unhealthy combination of slowing growth and rising inflation.
The pound found initial support from data on Thursday showing smaller-than-expected falls in UK retail sales -- driven by purchases of computer games like Grand Theft Auto -- which kept any prospect of near-term monetary easing at bay.
But economists said the data, though stronger than expected, still painted a lacklustre picture of the UK economy, with slowing growth and increasing price pressures dominating the outlook.
"Although retail sales were not quite as bad as feared, once you have looked at the reasons behind it in terms of things like "Grand Theft Auto" and the fact that back data was revised down...you are on pretty thin ice," Rabobank markets strategist Jeremy Stretch said.
By 1438 GMT, the pound was broadly steady at $1.9822 <GBP=>, while the euro was up 0.2 percent at 79.56 pence, having moved above 80 pence the previous day to close in on last month's record high of 80.98 pence <EURGBP=>.
The bearish outlook was highlighted by Bank of England policymaker Andrew Sentance who said on Friday that Britain's economy looks set for a "significant slowdown" and might even tip into recession.
"Whichever way you cut it, inflation, sales, housing, confidence, if you put too many things in a line you will end up with gloom and depression -- so there's not a great deal of positivity there," Rabobank's Stretch said.
Next week, the housing market comes into focus again with May data from the Nationwide Building Society, which is expected to show prices falling further.
The Confederation of British Industry's reported sales balance for May is also expected to signal significant weakness in retail sales, analysts say.
(Reporting by Veronica Brown; Editing by Ron Askew)
((RM:veronica.brown.reuters.com@reuters.net; Tel: +44 207 542 6745))
Keywords: MARKETS STERLING CLOSE
LONDON, May 23 (Reuters) - Sterling fell against the dollar on Friday as an unhealthy combination of slowing growth and rising inflation kept investors bearish on the outlook for the UK economy.
Better than expected UK retail sales and factory orders data the previous session had supported the pound, taking it to three week highs versus the dollar. But economists said that even though the numbers beat forecasts they still painted a pretty lacklustre picture for the UK economy and thus for the pound.
"Any sterling strength will be short-lived and it is likely to stay under pressure as news is on the negative side," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.
"Although much of this bad news is priced in, the extent to which things could deteriorate could have a negative impact."
Stannard added that Britain's ruling Labour Party's loss of a mid-term parliamentary seat to the Conservatives on Friday [ID:nL23531544] could add to political uncertainty and also damage the pound.
By 0729 GMT the pound was down 0.2 percent at $1.9763 <GBP=>. The euro was up 0.1 pence at 79.47 pence <EURGBP=>.
Investors will look for more clues on the extent of the slowdown in the UK economy from the second release of first quarter GDP data at 0830 GMT. Analysts are forecasting a 0.4 percent rise on the quarter and 2.5 percent on the year. (Reporting by Simon Falush; editing by Stephen Nisbet) ((simon.falush@reuters.com. +44 20 7542 7681) Reuters Messaging: simon.falush.reuters.com@reuters.net))
Keywords: MARKETS STERLING OPEN
By Naomi Tajitsu
LONDON, May 22 (Reuters) - Sterling rose on Thursday after a smaller-than-expected fall in UK retail sales and factory orders suggested that the Bank of England may put off cutting interest rates in coming months as it tackles rising inflation risks.
Retail sales fell 0.2 percent in April from March, clocking a second monthly slide but coming in slightly stronger than forecasts for a 0.5 percent fall. The previous month's figures were also revised to show a smaller fall [ID:nL22586765].
A manufacturing trends poll put the balance of UK factory orders at -10 in May, slightly stronger than forecasts for -12 but still falling for the second month in a row [ID:nL21921682].
While the sales data showed that sluggish spending may continue to weigh on the economy, analysts said the state of the economy still allowed the BoE some leeway to keep monetary policy tight in the light of inflation presssures.
The most recent evidence of higher prices came in the form of the industrial trends survey, which also showed that firms expect to raise prices at the fastest rate in 13 years.
With oil prices hitting record highs, some said that currencies whose central banks are intent on stamping out inflation risks -- like the BoE and the European Central Bank -- were being rewarded, as risks to their official rates were tilted to the upside.
"Sterling is in the process of being reassessed," said Geoffrey Yu, currency strategist at UBS Warburg in Zurich.
"With its current stance of targeting inflation and not cutting rates aggressively to begin with, people may be thinking the BoE's policy is a good one in the longer run."
This view helped to push sterling up more than half a percent to $1.9848 <GBP=>, recovering from an early slide to hit its strongest since early May.
The euro sank 0.9 percent to 79.32 pence <EURGBP=>, peeling away from a one-month high 80.34 pence hit on Wednesday.
The BoE and the ECB have explicitly said that they will target inflation, while the Federal Reserve has been slashing rates to deal with the fallout of the credit crunch.
Some analysts said that Thursday's data suggested a limited chance of the UK economy falling into a recession, while the U.S. economy was much more at risk of a deterioration in economic figures.
The BoE is struggling to balance economic weakness with rising inflation risks. The threat of higher prices has cut market expectations of a rate cut next month, although many still see a cut by the end of the third quarter [BOE/INT].
Minutes released on Wednesday from the BoE's May Monetary Policy Committee meeting showed that only policy dove David Blanchflower voted for a 25 basis point rate cut.
Sterling showed limited reaction to data from the UK's Nationwide building society which saw a 40 percent drop in home loans over the past year and a shrinking market share as the credit crunch has forced it to rely on savings to fund mortgage lending [ID:nL22205652]. (Editing by Stephen Nisbet) ((naomi.tajitsu@reuters.com; Tel: +44207 542 5830, Reuters Messaging: naomi.tajitsu.reuters.com@reuters.net))
Keywords: MARKETS STERLING CLOSE
By Naomi Tajitsu
LONDON, May 22 (Reuters) - Sterling rose on Thursday after a smaller-than-expected fall in UK retail sales and factory orders suggested that the Bank of England may put off cutting interest rates in coming months as it tackles rising inflation risks.
Retail sales fell 0.2 percent in April from March, clocking a second monthly slide but coming in slightly stronger than forecasts for a 0.5 percent fall. The previous month's figures were also revised to show a smaller fall [ID:nL22586765].
A manufacturing trends poll put the balance of UK factory orders at -10 in May, slightly stronger than forecasts for -12 but still falling for the second month in a row [ID:nL21921682].
While the sales data showed that sluggish consumer spending may continue to batter the economy, analysts said such weakness may not yet warrant a rate cut from the current 5 percent, particularly given an expected rise in inflation this year.
The industrial trends survey also showed that firms expect to raise prices at the fastest rate in 13 years.
"People had been looking for quite a sharp fall based on the numbers we've seen for consumer confidence and other indicators. It (the fall) was a lot less than expected ... this show that there is really no need for them to cut interest rates," said Jeavon Lolay, economist at Lloyds TSB Financial Markets.
"Inflation is a bigger concern and I think these data confirm that."
Still, the fall in sales had been limited by a rush to buy new, big-name video game releases, and some analysts said that purchasing power would likely erode in coming months, especially as the housing market struggles due to the credit crisis.
Britain's largest building society Nationwide on Thursday said it saw a 40 percent drop in home loans of the past year and a shrinking market share as the credit crunch has forced it to rely on savings to fund mortgage lending [ID:nL22205652].
Sterling rose 0.4 percent to $1.9796 <GBP=>, recovering from an early slide to hit its strongest since early May.
The euro fell 0.5 percent to 79.59 pence <EURGBP=>, retreating from a one-month high 80.34 pence hit on Wednesday.
Sterling also received a boost from a broadly weaker dollar, which was hit by a cut in the Federal Reserve's growth forecast for the year and a jump in oil prices to a record high.
"The dollar has been smacked, and this is part is helping to boost sterling," said Stephen Koukoulas, global strategist at TD Securities, while adding that a weak economy would continue to push downward pressure on the UK currency.
The BoE is struggling to balance economic weakness with rising inflation risks. The threat of higher prices has cut market expectations of a rate cut next month, although many still see a cut by the end of the third quarter [BOE/INT].
Minutes released on Wednesday from the BoE's May Monetary Policy Committee meeting showed that only policy dove David Blanchflower voted for a 25 basis point rate cut.
The market's outlook for more rate cuts has diminished after the BoE's quarterly inflation report last week showed inflation rising close to 4 percent this year despite a slowing economy.
(Editing by Ron Askew)
((naomi.tajitsu@reuters.com; Tel: +44207 542 5830, Reuters Messaging: naomi.tajitsu.reuters.com@reuters.net))
Keywords: MARKETS STERLING MIDSESSION
LONDON, May 22 (Reuters) - Sterling hit a session high against the dollar on Thursday and UK rate futures and gilts fell after a UK retail sales figures, while weak, were more resiliant than market participants had been expecting.
Figures showed that British sales fell 0.2 percent in April from the previous month, clocking a slide for the second straight month but coming in slightly stronger than forecasts for a 0.5 percent fall.
The data added to expectations that the Bank of England may not cut interest rates in the coming months as the economy may not be as grim as some had been expecting, while inflation risks remain high.
Sterling climbed shortly after the announcement, hitting a session high of $1.9767 <GBP=>, up 0.2 percent on the day. The euro slipped to a session low of 79.69 pence <EURGBP=>, pulling away from a one-month high hit on Wednesday.
"People had been looking for quite a sharp fall based on the numbers we've seen for consumer confidence and other indicators. It (the fall) was a lot less than expected...this show that there is really no need for them to cut interest rates," said Jeavon Lolay, economist at Lloyds TSB Financial Markets.
"Inflation is a bigger concern and I think these data confirm that."
UK interest rate and gilt futures fell after the data, pushing implied rates and government bond yields higher.
Two-year gilt yields rose two basis points to 4.88 percent <GB2YT=RR> and 10-year yields also rose two basis points to 4.90 percent <GB10YT=RR>.
The June gilt future fell around 15 ticks to 106.80 <FLGc1> and short sterling contracts wiped out modest gains to trade down as much as 5 ticks at the back end of the 2008 strip <0#FSS:>.
(Reporting by London Markets Team)
((naomi.tajitsu@reuters.com; Tel: +44207 542 5830, Reuters Messaging: naomi.tajitsu.reuters.com@reuters.net))
Keywords: MARKETS STERLING/DATA
Next: Sterling edges higher, UK retail sales awaited