Sterling shrugs off weaker UK business activity

By Yadarisa Shabong

(Reuters) -Sterling recovered from early losses against the dollar on Wednesday, brushing off data showing UK business activity weakened by the most in more than two years due to global trade tensions.

The pound was flat on the dollar at $1.3337, and was also little changed against the euro at 85.71 pence to the common currency. .

Sterling early in the day dropped as much as 0.7% against the dollar, which strengthened after U.S. President Donald Trump backed away from threats to fire Federal Reserve Chair Jerome Powell and expressed optimism over a trade deal with China.

But market sentiment towards U.S. assets remains fragile and the knee-jerk response was shortlived.

The bounce back came despite a survey on Wednesday showing that British private sector activity buckled in April under the strain of an escalating global trade war that threatens to tip the economy into a new downturn.

Export orders fell at the fastest pace since the early months of the COVID-19 pandemic in 2020, while costs faced by businesses grew at the fastest rate in more than two years as higher employment taxes and an increased minimum wage kicked in.

"The market may be reluctant to take kind of a strong view at this point in terms of how that's likely to impact the UK economy and pound," said Lee Hardman, senior currency analyst at MUFG.

"But certainly if you look at the (PMI) figures today ...it does show that business confidence did drop more sharply than expected in April, so that certainly increases the risk of the UK economy slowing down more in the second quarter."

Britain also posted a much bigger budget deficit for 2024/25 than expected, according to data on Wednesday.

(Reporting by Yadarisa Shabong in Bengaluru; Editing by Hugh Lawson)