Sterling edges higher as UK growth beats forecasts

Economic output expanded by 0.5% in May, although consumer services fell as the surge in inflation hit shoppers. A Reuters poll of economists had pointed to zero growth in May from April.

Sterling rose 0.3% to $1.1937 by 0600 GMT and was last up 0.1% at $1.1894. Against the euro, it was flat at 84.35 pence.

The pound has fallen sharply in recent weeks to new two-year lows, largely because of a soaring dollar but also as investors worry about political uncertainty following the resignation of British Prime Minister Boris Johnson.

The ruling Conservative Party is in the process of selecting a new leader to succeed Johnson.

Despite growth in May coming in better than expected, other indicators point to weakening economic momentum in Britain, making it even more difficult for the Bank of England as it tries to tackle inflation by increasing interest rates while at the same time not slowing the economic excessively.

“Given the scale of the slowdown and the softness in the forward-looking indicators, we do think that the recent growth data matters for the BoE,” Morgan Stanley economist Bruna Skarica said.

“While an extremely close call – and while we are yet to receive a full set of information ahead of the August meeting – we maintain our call for a 25bp (basis points) hike from the BoE next month.”

The BoE will next meet on Aug. 4.

Investors will also be watching the Conservative party leadership race. Most of the candidates to replace Johnson said they will cut taxes to get the economy growing again. Former finance minister Rishi Sunak, who is also in the race, said he wants to control inflation first.