The pound rose on Friday after data showed the British economy grew quicker than expected since the start of the COVID-19 pandemic, but was still set for its worst quarter against the dollar in a year.
The Office for National Statistics said Britain's economy in the second quarter of 2023 was 1.8% larger than in the final quarter of 2019, the last full quarter before the start of the pandemic.
Its previous estimate on Aug. 11 concluded the economy was still 0.2% smaller than before the pandemic, which had placed it at the bottom of the table among major advanced economies.
Sterling rose by as much as 0.52% to a session high of $1.2265, and was last at $1.2264. For the quarter, however, the currency has lost 3.3% in value.
Earlier this week, it hit a six-month low of $1.2211 under pressure from the ongoing rise in the dollar, which was heading for its strongest quarterly performance in a year.
"Sterling has rallied in line with the dollar correction into this morning's market open, but there are no real UK-specific drivers that would justify a sustained sterling outperformance at this stage," ING strategist Francesco Pesole said.
The dollar is getting an outsized boost from a hefty rise in U.S. Treasury yields, which reflects investors' belief that U.S. interest rates are unlikely to start falling anytime soon.
The 10-year note has risen 45 basis points this month, compared with an 8 bps rise in 10-year UK gilt yields , which saps the pound's appeal to non-UK investors that can bag juicier returns elsewhere.
Money markets show traders have not ruled out one final rate hike from the Bank of England this year and place a 33% chance on an increase at the upcoming meeting in November.
Just a few weeks ago, traders were pricing in a peak of around 6% in UK rates next year. Removing that prospect has sent the pound down by over 3% this month, marking its largest monthly slide since last September's budget crisis stripped almost 4% off the currency.
Against the euro, the pound has lost 0.6% this quarter and was last up 0.1% on the day against the single European currency at 86.51 pence.
(Reporting by Amanda Cooper; Editing by Varun H K)