The Pound rallied from its lowest point against the U.S. Dollar since March 2020 on Wednesday, yet the move may prove to be short-lived as UK economic growth decelerates and a possible trade dispute with the EU weighs.

The UK’s growth outlook is seen as among one of the weakest for wealthy countries in 2023, and uncertainty remains over the pace of Bank of England’s policy tightening plans to curb inflation without further damaging the economy, Reuters reports.

Sterling fell under $1.20 on Tuesday for the first time since March 2020 yet has rallied 0.75% to 1.2086.

"There is a little bit of bargain hunting but I suspect the market is still short on the Pound," stated Jane Foley, head of forex strategy at Rabobank, going on to say that the rebound was likely to be short-term.

"I think the headwinds are still there," she continued, citing market fears about growth and investments may be fuelled by the trading conflict with Brussels and a possible new independence referendum in Scotland.

The UK economy shrank in April after contracting 0.1% the month before. These were the first two consecutive declines since the outbreak of the pandemic in 2020.

Against the Euro, Sterling remained flat at 86.86 pence, not far away from its lowest point against the single currency since May 2021.

In addition, investor focus is on the U.S. Federal Reserve’s upcoming policy meeting. Markets are pricing in an 87% chance of a 75-basis point interest rate rise in a bid to curtail red-hot inflation.

According to analysts, Sterling could recover against the Dollar should the Fed announcement underwhelm market forecasts, reports Pound Sterling Live. "It should be noted that given current aggressive market pricing, there is a risk that the Fed fails to deliver on its expected hawkishness," stated George Vessey, currency analyst at Western Union Business Solutions.