Sterling Slides on Data, IMF Warns UK Over Growth
Sterling tumbled following minutes released by the Bank of England and disappointing retail sales, as the IMF warned the U.K. is at risk of "permanent damage" if its growth remains persistently slow.
Sterling fell by as much as 0.5 percent as retail sales missed expectations, with total food sales plunging 4.1 percent - the largest monthly fall in almost two years.
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By midday in London, sterling had recovered slightly to around $1.5094.
Meanwhile, the Bank of England also surprised markets with the minutes from its latest Monetary Policy Committee meeting, which revealed that outgoing Governor Mervyn King continued to vote in favour of more quantitative easing (QE), despite stronger gross domestic product (GDP) data and inflation falling to 2.4 percent in April, its biggest fall in a year.
Jonathan Webb, head of FX strategy at Jefferies Bache, told CNBC on Tuesday that the fall in sterling was not a surprise given the data.
"I think the market thought after the stronger GDP, the upgrade of the assessment in the inflation report, that King was likely to move back to the sidelines, so I am not surprised that sterling is lower on this," he said.
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Webb said he thought the U.K. economy would surprise on the upside, but that sterling would suffer in the shorter term.
"The economy is recovering, so over time the pound will do better, but the expectations of Carney and the discussions around the potential exit from the EU are negative for the pound," he said.
(Read More: No Triple-Dip: UK Economy Fears Ease)
"We see the dollar stronger, strengthening as the US economy recovers and as there is more talk about scaling back QE. That itself will take the pound below 1.50," said Webb. "Against the euro, it is much more mixed. We see the euro lower as well, so really euro/sterling is not such an interesting story at the moment – two very weak regions."
Sterling's fall comes as the International Monetary Fund (IMF) warned Britain's Chancellor George Osborne that a strong sustainable recovery remains a long way off in the U.K.
"The key risk is that persistent slow growth could permanently damage medium-term growth prospects—this could arise if private sector deleveraging is larger than expected, credit conditions fail to improve, external demand does not pick up, and the drag from fiscal consolidation is greater than anticipated," said Olivier Blanchard, the IMF's chief economist, in his latest assessment of the U.K. economy.
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The IMF also said the disposal of public holdings in state-backed lenders the Royal Bank of Scotland and Lloyds should be a priority for the U.K.
"The banks have made progress in repairing their balance sheets and improving profitability. But challenges remain, as evident by the recent failure to divest surplus business lines, and the still-low market-to-book value for RBS," said Blanchard.
"Any strategy should seek to return the banks to private hands in a way that maximizes the value for taxpayers, strengthens confidence and competition in the sector, and minimizes outward spillovers. In this context, if a sovereign backstop is required to meet a capital shortfall, it should be provided, as this would have a high multiplier," he added.
—By CNBC.com's Jenny Cosgrave; Follow her on Twitter