Pound gains, but focus stays on struggling UK economy

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Luke Macgregor | Reuters

The British pound rose against the dollar on Thursday, as investors shrugged off official data revealing a record shortfall in the United Kingdom's current account deficit in early 2022.

Despite the bounce, the pound has rounded off its biggest six-month drop since 2016 in the first half of 2022, down over 10% versus the dollar this year.

The pound was up 0.4% against the dollar at $1.2175, clawing back losses that had seen it trade 0.2% lower earlier in the day.

Stephen Gallo Head of FX strategy for BMO Capital Markets, advised against reading too much into the daily moves, instead pointing to the larger downward trend that has seen the pound depreciate in 2022.

"To me sterling is a fantastic currency to sell, you just have to have something to sell it against," said Gallo.

British central bankers are grappling with the task of taming inflation while avoiding a severe economic downturn, a backdrop exerting downward pressure on the pound.

"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 read more .

The Bank of England (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 basis points (bps).

Inflation hit a 40-year high of 9.1% last month, the fastest pace among the Group of Seven wealthy nations.

But expectations of a bigger hike were tempered on Wednesday after BoE Governor Andrew Bailey struck a softer tone, saying the central bank would not necessarily have to act "forcefully" to get inflation under control read more .

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. read more

"The market has moved to the possibility of pricing in a 50 bps rate hike, but it remains a very close call," said Gkionakis.