Sterling pulled away from a four-month low against the dollar on Monday but was still almost 4 per cent lower than two weeks ago, with investors having pushed back their bets on when the Bank of England will raise interest rates until well into next year.
A disappointing report last week from Britain’s dominant services sector, which grew at its weakest pace in over two years in August, added to doubts over whether the BoE would be able to raise rates from their historic lows any time soon given the current worries over market volatility and global growth.
BoE Governor Mark Carney has said a slowdown in China’s economy could push down UK inflation, but that did not for now change the bank’s position on when and how it might raise rates.
Still, a month ago, sterling money markets were pricing in a hike around the beginning of next year, whereas the earliest that they now expect the BoE to move is around April or May.
BoE monetary policy committee
Investors are now eyeing Thursday, when the BoE’s nine-strong Monetary Policy Committee will convene and release minutes from the meeting. Last month just one MPC member voted in favour of an immediate rate hike.
“We think it is too soon for policymakers to much shift language,’’ said Citi currency strategist Josh O'Byrne. “With global risks rising, the argument for a more hawkish assessment is weaker, so there could be scope for some sterling-negative disappointment.’’
Sterling was half a per cent higher on Monday at $1.5252. It touched as low as $1.5168 on Friday, its weakest since early May, after data showed US unemployment hitting its lowest since 2008, keeping alive some investors’ bets that the US Federal Reserve could hike rates as soon as this month.
The pound was also half a per cent up versus the euro at 73.16 pence.
“With rate markets having now pushed BoE rate hike pricing back..., we think the pound could benefit from any indication in the accompanying minutes that committee members are inclined to look through this latest disruption in anticipation of rising wage pressures,’’ wrote BNP Paribas analysts.