A British 5 pound sterling note. Image Credit: Gulf News archives

Dubai: The British pound recovered from its lowest level against the US dollar since March 2020, a day ahead of the Bank of England's decision on whether or not it will raise rates - a verdict that is detrimental to the currency's valuation and exchange rates in the days to come.

The pound, which plunged below $1.20 on Tuesday for the first time since the COVID-19 crash in March 2020, as much as 1 per cent on Wednesday and was up 0.77 per cent at $1.2089. Check the latest forex rates here. Against the UAE dirham, it was at 0.21.

Britain's growth prospects are seen among the weakest for rich countries in 2023, and there is uncertainty over how fast the Bank of England (BoE) - which is expected to raise interest rates again on Thursday - can tighten policy this year to tame inflation without further hurting the economy.

All but one of the 56 economists polled by Reuters last week expected the BoE to raise its Bank Rate on Thursday to 1.25 per cent from 1.0 per cent, but many warn a rise to 1.5 per cent could be a close call.

"There is little bit of bargain hunting but I suspect the market is still short on the pound," said Jane Foley, head of forex strategy at Rabobank, adding the currency's rebound was likely to be temporary.

Britain's economy unexpectedly shrank in April after contracting 0.1 per cent in March, the first back-to-back declines since the early days of the pandemic in March and April of 2020.

Versus the euro, the pound also made sizeable gains and was up 0.7 per cent at 86.18 pence, recovering further from its lowest level against the single currency since May last year.

Sterling's rise came as the euro trimmed gains against the dollar after the European Central Bank announced it will skew reinvestments of maturing debt to help more indebted members and will devise a new instrument to stop fragmentation of the market of euro zone government bonds.

Investors were also focused on the Federal Reserve's policy meeting later on Wednesday, for which markets are overwhelmingly pricing a 75 basis point interest rate hike as policymakers try to rein in rampant inflation.

- with inputs from Reuters