LONDON - Sterling rose against the dollar on Thursday, driven by dollar weakness as traders shrugged off Wednesday's dismal economic data but remained cautious about the longer-term outlook for Britain, before Brexit and the end of the UK furlough scheme.
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 much on the news, which was outweighed by dollar weakness by the end of the session.
"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 $1.3081 at 0958 GMT, up 0.4% since New York's close versus a weaker dollar GBP=D3 . So far in August, it has been broadly in line with its pre-pandemic levels.
Versus the euro, it was little changed, at 90.455 pence per euro.
Even though dollar weakness boosts cable, investors are generally bearish on the pound for the rest of the year - expecting it to rebound in 2021.
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.
Brexit is 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.
Commerzbank strategist You-Na Park-Heger wrote that so long as there are no positive developments in Brexit negotiations, the pound is likely to be under depreciation pressure.
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.
(Reporting by Elizabeth Howcroft; editing by Alex Richardson, Larry King) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))