Pound tumbles after data shows British economy contracted in June



By Alun John

Aug 12 (Reuters) - Sterling slid against a firming dollar on Friday and also lost ground on the euro as data showed Britain's economy contracted in June, even if not by as much as had been feared.

The Office for National Statistics said gross domestic product fell by 0.6% in June, the biggest contraction since January 2021 but less severe than the 1.3% drop predicted by a Reuters poll of economists.

The pound GBP=D3 tumbled 0.58% against the dollar to $1.2143, in morning trade, falling more sharply than peers against the rallying greenback.

The euro EUR=EBS and Japanese yen JPY=EBS also lost ground, however, as markets digested a new round of hawkish remarks from policy makers at the U.S. Federal Reserve, helping the dollar regain some of its losses from earlier in the week.

June's GDP decline was partly a result of two bank holidays in the month to celebrate Queen Elizabeth's Platinum Jubilee.

The data also suggested growing weakness among consumer-facing sectors of the economy as Britons deal with inflation reaching a 40-year high in the wake of the war in Ukraine.

The euro climbed 0.3% on the pound EURGBP= to 84.82 pence its highest in two-and-a-half weeks.

It is up nearly 0.5% on the week, which would be its biggest weekly gain since mid June, though may struggle to climb much further.

"EUR/GBP is slightly stronger than we thought and could edge up to the 0.8485 area. But given the challenges faced on the continent, we would not chase EUR/GBP higher," analysts at ING said in a note.

Both Britain and mainland Europe are grappling with a string of problems from weak economies, surging inflation, and latterly growing fears of drought.

The Bank of England last week predicted Britain would enter a recession at the end of 2022 and not emerge until early 2024 as it raised interest rates to battle inflation, which it said was likely to exceed 13% in October.

News British households faced new water usage restrictions on Friday, with parts of England likely to formally declare a drought, also weighed on the pound, which has been reacting to such headlines this week.



Graphic: World FX rates in 2022 Link
Graphic: Trade-weighted sterling since Brexit vote Link



Reporting by Alun John
Editing by Mark Potter

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