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Sterling slips below $1.38 after data shows UK economy hit record slump in 2020

The pound slipped below $1.38 againstthe dollar but was steady against the euro in early Londontrading on Friday, after data showed Britain’s economy suffereda record slump in 2020, but grew in the final quarter.

The UK economy shrank 9.9% in 2020, which is the biggestannual fall in output in more than 300 years – although itavoided heading back towards a recession in the final quarterand looks set to recover in 2021.

The pound has been boosted in recent weeks by optimism theUK’s relative success in rolling out COVID-19 vaccines, as wellas relief that a last-minute Brexit deal was reached at the endof 2020.

It strengthened to a three-year high of $1.3865 onWednesday.

Although Friday’s GDP data was too backward looking to causea significant currency market reaction, the pound eased off itsrecent gains and was down 0.2% on the day versus the dollar at$1.3790 at 0843 GMT.

Versus the euro, it was little changed at 87.82 pence pereuro.

“Today’s GDP print for Q4 is more positive than anticipated,but much of this good work will have already been undone byrestrictions applied to the economy so far this year,” said HughGimber, global market strategist at J.P. Morgan AssetManagement.

But analysts remained upbeat about the pound’s prospects:Michael Hewson, chief market analyst at CMC Markets UK, said thepound’s recent gains were likely to continue towards $1.40versus the dollar and 0.86 versus the euro.

Prime Minister Boris Johnson has said that he will announcedetails about the schedule for easing lockdown restrictions inthe UK on Feb. 22.

Elsewhere, Britain and the European Union reiterated onThursday their commitment to resolve post-Brexit trade problemsover the Northern Irish border.

Britain’s exit from the EU’s trading orbit in January hasled to significant disruption to trade between Northern Irelandand the rest of the United Kingdom, straining relations asLondon and Brussels hold each other responsible for the problem.

“At present there has been limited financial market reactionto the worsening relations but there are clear risks that itcould escalate and become a financial markets issue – certainlyan issue that could thwart the recent upward momentum for thepound,” wrote MUFG head of research Derek Halpenny in a note toclients.

“We maintain our positive GBP view for now but will monitorclosely how this consultation period proceeds over the comingdays,” he added.
Source: Reuters (Reporting by Elizabeth Howcroft; Editing by Nick Macfie)