Sterling falls against dollar amid concerns over UK economy

(Reuters) -Sterling fell against a strengthening dollar on Wednesday, with investors concerned about a deteriorating UK growth outlook, though sceptical about a further significant pound decline.

British manufacturing activity expanded in May at the weakest rate since January 2021, as producers of consumer goods struggled against a worsening cost-of-living crunch.

British house prices surged again last month, but a slowdown caused by the cost-of-living challenges is likely on the way, mortgage lender Nationwide said.

The data raised new questions about the strength of Britain's economy, where inflation at a 40-year high has driven consumer confidence to record-low levels.

At 1425 GMT, sterling was 0.9% lower against the dollar at $1.2505, but still well off its mid-May lows when it touched its lowest level since May 2020.

It fell 0.1% to 85.3 pence versus the euro.

The greenback rose 0.7%, lifted by higher Treasury yields as global inflation worries flared anew.

"Sterling may lead the way for now on the downside, amid concerns about the economy," SocGen analysts said.

"The pound's biggest support comes from its valuation. GBP/USD is 11% below its average level of the last decade, and 4% below the post-referendum average," they added.

ING analysts "do not see a sterling downtrend morphing into a collapse."

Money markets still discount an aggressive monetary tightening path from the Bank of England (BoE) despite concerns of economic slowdown as they price in 140 basis points of BoE rate hikes by year-end.

However, analysts have recently argued that hiking rates to fight surging inflation is a pound negative, as it might hurt an already weak economy. They added that sterling has recently taken on the characteristics of a growth currency, being driven more by equities than rate differentials.

UK politics remain in investors' focus as Prime Minister Boris Johnson faces a potential confidence vote from his lawmakers, with commentators suggesting he could consider holding an early election before an expected date in 2024 to rebuild his authority.

Deputy prime minister Dominic Raab said Britain was "very unlikely" to hold an early election.

(Reporting by Stefano Rebaudo Editing by Mark Potter)