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Foreign Exchange

Sterling resumes decline as BOE hawks soften

The pound was the worst performing of the G10 currencies on Wednesday, amid fading expectations for interest rate hikes, as policy makers suggested slower economic growth was a greater concern than faster inflation.

Sterling fell against all of its major peers, after minutes from the Bank of England’s May 5 meeting showed two previously hawkish committee members felt the argument for higher rates was “finely balanced”, given the weakness of the real economy and uncertain outlook.

“The pound briefly rallied after the vote came in 6-3, but it soon turned negative as people focused on the growth outlook,” said Simon Smith, Chief Economist at Fx Pro. “It’s hard to see the BOE raising rates this year.”

The pound fell as much as 0.7 percent against the euro to 88.21 pence, traders said, and declined a similar amount against the dollar, trading at $1.6147 in early afternoon.

“Sterling has traded poorly for most of the session and we are still seeing some selling below £1.6150,” says CitiFXWire. “There was some bank buying ahead of the 100 day moving average, kicking in at $1.6137.”

Three month short sterling futures for December were little changed at 98.930, suggesting investors have almost totally discounted the chance of a central bank rate hike over the coming months.

Sterling’s decline comes a day after a report showing UK inflation accelerated to 4.5 percent last month, the fastest since October 2008. Bank of England governor Mervyn King said in the letter to Chancellor of the Exchequer George Osborne that inflation is being boosted by higher sales tax and energy. That saw some good interest to buy sterling yesterday. Traders say that much of today’s move was a wash out of yesterday’s buying.

“I think peoples first reaction post the CPI number was to buy sterling, but it was a very short lived reaction, “ says one trader a European banks. “I think the reaction has been fairly predicable really: High inflation-no growth, not great for the pound.”

It’s an indication that concerns about growth are beginning to predominate views on the future direction of the currency.

“That inflation figure a couple of months ago would have sent sterling screaming higher,” Smith said. “That fact it hasn’t done so this time suggest real concern over how the household sector will battle through a second year with real falling incomes.”

The UK economy flat-lined in the six months to the end of the third quarter, and policy makers said they now expected lower growth in 2011 than when they published their last policy minutes in February.

“Households might have much further to adjust to the significant squeeze on real incomes. In that case growth could remain sluggish,” the BOE said.

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