Sterling at one point dropped as much as 0.6 per cent to $1.2934 after first-quarter GDP was weaker than expected, at 0.2 per cent. That compared to 0.8 per cent in Spain and 0.5 per cent across the eurozone.
In mounting a subsequent recovery to $1.2964 towards the end of the London trading session, the pound demonstrated that it does command some support among investors. However renewed Brexit concerns are casting doubt on the currency’s ability to reach new heights.
With sterling hovering around $1.30 on an almost daily basis, “the market continues to be of two minds”, said Brad Bechtel of Jefferies International.
Sterling broke through $1.30 last week for the first time since September, helped by a dollar weakened by worries about White House controversies and their impact on the Trump administration’s domestic agenda.
Some analysts expected the $1.30 breakthrough to trigger a new higher range, but investors are not yet ready to continue the rally, preferring to focus on the euro, which has been climbing on brighter eurozone prospects.
Mr Bechtel said most investors expected a move to around $1.32 to $1.33, “but still others believe we should be a lot lower on Brexit related uncertainties. Meanwhile the data comes in mixed and the central bank retains a neutral stance.”
The uncertainty is underlined in sharp moves being unwound in very short periods of trading. Stephen Jen, a currency specialist, at Eurizon SLJ Capital said he expected Brexit negotiations, which are due to begin formally in mid-June, to be tough from the outset and predicted sterling would weaken before stabilising and recovering when the talks commence.
“The hesitation in cable reflects the various opinions in the market on what could happen,” said Mr Jen.
After the 3 per cent rally triggered in mid-April by the announcement of the UK general election, sterling is suffering from market “fatigue”, said Adam Cole, forex strategist at RBC Capital Markets.
“There are stronger stories elsewhere that people are prepared to commit to, and election excitement has unwound a bit. Despite plenty of noise, sterling doesn’t have much direction.”
Other observers believed that sterling was bouncing around because of a shortage of market participants.
“These are gappy moves with not much liquidity,” said Paul Lambert at Insight Investment. Antony Foster, who runs Nomura’s G10 FX spot trading desk, described the illiquid sterling market as “the new normal”, as traders’ interest in the currency diminishes.
“People are wary of being over-exposed to sterling,” he said. “It will carry on like this for a while, this uncertainty. I imagine it will be a little bit choppy for some time.”