LONDON: Sterling recovered from itslowest level against the dollar since March 2020 on Wednesday,but the reprieve could prove temporary with slowing UK economicgrowth and a potential trade conflict with the European Unionweighing on the currency.

Britain’s growth prospects are seen among the weakest forrich countries in 2023, and there is uncertainty over how fastthe Bank of England - which is expected to raise interest ratesagain on Thursday - can tighten policy this year to tameinflation without further hurting the economy.

The pound, which plunged below $1.20 on Tuesday for thefirst time since the COVID-19 crash in March 2020, bounced back0.75% to 1.2086.

“There is little bit of bargain hunting but I suspect themarket is still short on the pound,” said Jane Foley, head offorex strategy at Rabobank, adding the currency’s rebound waslikely to be temporary.

“I think the headwinds are still there,” she added, notingthe fresh trading row with Brussels and a potential newindependence referendum in Scotland were likely to add to themarket’s worries about UK growth and investments.

Britain’s economy unexpectedly shrank in April aftercontracting 0.1% in March, the first back-to-back declines sincethe early days of the pandemic in March and April of 2020.

Reacting to the British government’s plans to overridepost-Brexit trade rules for Northern Ireland, the EuropeanCommission on Wednesday launched two new legal proceedingsagainst London and resumed another challenge it had previouslypaused.

Versus the euro, the pound was flat at 86.86pence, close to its lowest level against the single currencysince May last year after the announcement of an emergencymeeting at the European Central Bank boosted the euro.

Investors are also focused on the Federal Reserve’s policymeeting later on Wednesday, for which markets are pricing in an87% chance of a 75 basis point interest rate hike aspolicymakers try to rein in rampant inflation.