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Sterling strengthens due to weaker dollar, shrugging off GDP slump

Markets were bearish in early trading, with European stocks down and the dollar weaker as investors started to lose hope that the U.S. government would agree on a stimulus deal to support the economy and the millions of workers who have lost their jobs.

Britain’s economy shrank by a record 20.4% in the second quarter – a substantially bigger slump than in the euro zone (12.1%) or United States (9.5%), data on Wednesday showed.

But the pound did not decline significantly on the news, which was outweighed by dollar weakness by the end of the session, which pushed cable up.

“In reality, most market participants had been pencilling in a decline in Q2 GDP of ‘around’ 20% for some time now so yesterday’s release from the ONS didn’t come as too much of a surprise even if the magnitude of the contraction dwarfs anything any of us have experienced before,” RBC strategists wrote to clients.

Sterling was at $1.3077 at 0744 GMT, up 0.4% since New York’s close versus a weaker dollar. So far in August, it has been broadly in line with its pre-pandemic levels.

Versus the euro it was little changed, at 90.46 pence per euro.

The next flashpoint for global market sentiment is likely to be Saturday, when top U.S. and Chinese officials will meet to review the progress of their phase one trade deal.

Even though dollar weakness boosts cable, investors are generally bearish on the pound.

There is expected to be a lag in Britain’s labour market recovery later in the year, after the government’s furlough scheme ends in October.

Analysts said that uncertainty over the trajectory of the coronavirus was also limiting the pound. Britain changed its methodology for counting COVID-19 deaths on Wednesday, but the new death toll was still the highest in Europe.

Brexit is also weighing on the outlook for sterling, with Britain due to leave the single market and customs union on Dec. 31 whether or not a deal has been reached.

“Investors are awaiting the next chapter in the EU-UK trade negotiations, which appear the true driver of sterling after growth data failed to particularly shake GBP off its recent relatively tight ranges,” ING strategists wrote.

Britain said on Thursday it would step up demands for the United States to drop tariffs on goods such as single malt Scotch whisky, after industry warnings.
Source: Reuters (Reporting by Elizabeth Howcroft; Editing by Alex Richardson)

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