The pound strengthened to 5-day highs against the euro and franc in European deals on Wednesday despite the Bank of England lowered its growth estimate for the U.K. economy as fiscal consolidation and Eurozone debt crisis weigh on demand.
Meanwhile, the pound recovered its recent losses against the yen and dollar.
In its quarterly Inflation Report, the BoE said economic growth is likely to be around 2 percent in two years, down from the 2.6 percent expansion estimated in May.
"The impact of the euro-area debt crisis, together with the fiscal consolidation and tight credit conditions at home, is likely to continue to weigh on demand," it said.
The bank said the outlook for UK growth remains unusually uncertain. The UK economy is navigating tough waters, Governor Mervyn King said.
The pound is currently worth 1.5647 against the dollar, up from a low of 1.5575 hit at 5:25am ET. The near term resistance level for the pound-dollar pair is seen at 1.570.
Against the yen, the pound gained after hitting a low of 121.94 at 5:55 am ET. At present, the pound-yen pair is worth 122.52 with 122.7 seen as the next upside target level.
The pound is presently trading at 5-day highs of 0.7895 against the euro and 1.5225 against the franc, compared to lows of 0.7949 and 1.5118, hit respectively at 5:05 am ET. If the pound climbs further, it will target 1.525 against the franc and 0.786 against the euro.
In economic news, German trade surplus unexpectedly increased in June as imports declined at a pace double than that of exports, indicating that the sovereign debt crisis and the economic slowdown has dampened both domestic and foreign demand.
Trade surplus for June was EUR 17.9 billion compared to expectations of EUR 14.6 billion. The surplus figure grew from EUR 15.6 billion in May and EUR 12.5 billion in June last year. In calendar and seasonally adjusted terms, the balance was in a surplus of EUR 16.2 billion.
Exports fell 1.5 percent month-on-month on a calendar-and-seasonally adjusted basis and this was faster than economists' forecast for a 1.3 percent drop.
Imports fell 3 percent month-on-month following a 6.2 percent rise in the preceding month. The May growth rate was revised from the previously reported 6.3 percent.
Looking ahead, the U.S. Labor Department is scheduled to release its preliminary report on second quarter non-farm productivity and unit labor costs at 8:30 am ET.
by RTT Staff Writer
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