RTRS:Sterling recovers versus dollar, but weak data to cap gains
(Reuters) - Sterling recovered from a three-week low against the dollar on Friday on relief that the United States looked to be edging towards a deal to break its fiscal impasse, but recent weak UK data would cap gains, traders said.
Hopes of a deal were raised after Republican lawmakers on Thursday offered a plan that would extend the U.S. government's borrowing authority for several weeks, staving off a default that could come as soon as October 17.
While no deal emerged from a meeting at the White House, the two sides said they would continue to talk. All of which kept alive risk sentiment and saw safe-haven currencies like the yen suffer and support the pound.
Against the dollar, sterling was up 0.1 percent at $1.5995, recovering from a trough of $1.5914 struck on Thursday, its lowest level since September 18.
Against the euro, however, sterling fell to a five-week low. The single currency was up 0.3 percent at 84.95 pence, its highest level since early September.
"There could be some more losses for sterling. Euro/sterling could edge towards 85.20 pence and I do not think sterling/dollar can rise much above $1.60," said Peter Kinsella, currency strategist at Commerzbank.
"We are seeing a bit of slowdown in the UK economy, not a very big one, but enough to make investors rethink whether they would want to go long sterling at these levels."
Data earlier this week showed industrial output fell 1.1 percent on the month in August which raised some doubts how fast the UK economy can strengthen after a recent run of above-forecast data.
A steady flow of forecast-beating numbers lifted sterling nearly 8 percent against the dollar between early August and early October as investors brought forward their expectations of when UK interest rates would rise.
Analysts said the pace of sterling's rise had left it vulnerable to weak economic data. Investors are also pushing back rate hike expectations, all of which has been weighing on the pound.
A few weeks ago they were expecting the first rate move in late 2014, but that has now been pushed back to two years.
The 18-month sterling overnight interbank average rate (SONIA) was last at 0.4950 percent, down from 0.5215 percent three weeks back. The Bank of England's bank rate is at 0.5 percent and a SONIA rate above that indicates the market is pricing in the risk of a hike.
