By Harry Robertson
LONDON (Reuters) -The pound fell slightly on Thursday after data showed the British economy fell into a recession at the end of 2023, causing investors to increase their bets on rate cuts from the Bank of England this year.
Sterling was last down just under 0.1% at $1.2558 from $1.268 right before the data.
The euro was up 0.11% against the pound at 85.46 pence, taking it further away from the six-month low of 84.98 pence hit on Tuesday.
Britain's gross domestic product shrank 0.3% in the three months to December, entering a recession in the second half of 2023 after it also contracted by 0.1% between July and September, data from Office for National Statistics showed.
The 0.3% contraction was worse than the 0.1% fall economists polled by Reuters were expecting.
"While the Bank of England’s focus will likely remain on price data, the bigger drop in output and the politics of being in a technical recession will no doubt become uncomfortable," said Sanjay Raja, Deutsche Bank (ETR:DBKGn)'s chief UK economist.
Market expectations for BoE rate cuts have bounced around this week. Data on Tuesday showed that wage growth slowed less than expected at the end of the year, but figures on Wednesday showed inflation held steady at 4% in January, confounding expectations that it rose.
After Thursday's GDP data, investors were expecting around 73 basis points of cuts from the BoE this year, according to money market pricing.
That is up sharply from 60 bps on Tuesday, when strong U.S. inflation data also added to expectations that central banks would be slow to cut rates. Yet it is down sharply from around 130 bps at the start of the year.
Despite the fall in sterling on Thursday, Bank of America (NYSE:BAC) upgraded its forecast for the pound, saying it should hit $1.37 by the end of the year, compared to its previous $1.31 prediction.
BofA FX strategist Kamal Sharma said "elevated services inflation and tight labour markets" should keep UK interest rates relatively high compared to other countries, supporting the pound.