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

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

The UK economy shrank 9.9% in 2020, which is the biggest annual fall in output in more than 300 years – although it avoided heading back towards a recession in the final quarter and looks set to recover in 2021.

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

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

Although Friday’s GDP data was too backward looking to cause a significant currency market reaction, the pound eased off its recent 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 per euro.

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

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

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

Elsewhere, Britain and the European Union reiterated on Thursday their commitment to resolve post-Brexit trade problems over the Northern Irish border.

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

“At present there has been limited financial market reaction to the worsening relations but there are clear risks that it could escalate and become a financial markets issue – certainly an issue that could thwart the recent upward momentum for the pound,” wrote MUFG head of research Derek Halpenny in a note to clients.

“We maintain our positive GBP view for now but will monitor closely how this consultation period proceeds over the coming days,” he added.