By Stefano Rebaudo
(Reuters) - Sterling edged higher against a weakening dollar on Friday after British economic data came in stronger than expected.
According to official data, Britain's economy shrank by a less severe than-expected 0.2% in the three months to September, which is likely to represent the start of a lengthy recession.
The pound scored its biggest daily gain since March 2020 against the dollar on Thursday after U.S. consumer prices cooled off in October, supporting expectations that the Federal Reserve might slow down its rate tightening path.
"UK GDP monthly and quarterly data early this morning are helping GBP-USD hold the line at around 1.17," Unicredit analysts said.
Sterling rose 0.2% to $1.1730, after hitting its highest since Aug. 26 at $1.1766.
"The pound has been benefiting from its high sensitivity to global risk sentiment and the unwinding of a large short position," ING analysts said.
Investors poured into risky assets after Thursday’s U.S. inflation data, sending the dollar tumbling and U.S. Treasury yields to a five-week low.
But analysts remained cautious ahead of the announcement of the government's budget programme on Nov. 17 by Prime Minister Rishi Sunak and his finance minister Jeremy Hunt.
Sunak suggested a squeeze on public spending and potentially higher taxes in a move that could further weaken the economy.
Hunt said on Friday the best way to help cash-strapped households was to produce a fiscal plan that would bring down inflation, repeating that tough decisions on tax and spending would be needed to repair Britain's public finances and the government's credibility.
Investors are also waiting for jobs data due next week, which might provide further cues about potential inflation second-round effects.
The Bank of England (BoE) chief economist recently said the central bank could not consider the threats posed by inflation to be under control and interest rates will need to rise further, even with the economy going into recession. Sterling fell 0.2% against the single currency to 87.22 pence per euro.
(Reporting by Stefano Rebaudo, editing by Emelia Sithole-Matarise and Tomasz Janowski)