Sterling's Fluctuation and UK's Economic Concerns Amid Stagnation

Sterling steadied against the dollar after initial dips but fell against the euro. July's stagnant economic data from Britain, including a dip in manufacturing output, raised concerns. While some analysts downplayed the impact, others saw downside risks to third-quarter GDP growth. The Bank of England faces increasing pressure amid potential tax hikes and upcoming budget discussions.

Sterling gained slightly versus the dollar on Wednesday, rebounding from an earlier dip, but slid against the euro after data showed Britain's economy stagnated unexpectedly in July owing to a decline in manufacturing output.

British economic output remained unchanged month-on-month in July, mirroring June's performance, according to figures from the Office for National Statistics. Economists had anticipated a 0.2% rise in GDP for the month, according to a Reuters poll.

Analysts at Peel Hunt advised not to overemphasize the miss, citing healthy forward-looking business activity surveys and noting the inherent volatility in monthly data for heavy industries. Similarly, JPMorgan analysts indicated July's economic output doesn't reflect a broader trend but acknowledged diminished upside risks for third-quarter GDP growth.

Deutsche Bank's senior economist Sanjay Raja noted downside risks to third-quarter growth relative to the bank's 0.4% quarter-on-quarter baseline projection. Sterling edged up 0.1% to $1.3093 after falling to $1.3071 earlier but dropped 0.7% against the yen to 185.05 yen.

Market participants were also anticipating a critical U.S. inflation report, which could shed light on Federal Reserve's rate cut stance. Meanwhile, the euro climbed 0.14% versus sterling to 84.37 pence. The Bank of England is likely to maintain interest rates next week, though markets are speculating a potential rate cut later in the year.

Focus in the UK will also center on the new Labour government's budget next month. British banks are ramping up lobbying efforts against potential tax hikes in the October 30 budget, amid concerns about financial sector contributions to public finances, sources told Reuters.

(With inputs from agencies.)