The British pound slid below $1.31 yesterday as the dollar rebounded and investors prepared for a Bank of England policy meeting this week at which markets are now pricing in a near-90 per cent chance of a 25 basis point rate rise.
Sterling has recuperated somewhat in recent sessions, moving away from the 10-month low it touched earlier in July on growing worries that Britain was headed for a cliff-edge departure from the European Union.
The Bank of England appears comfortable with the market pricing in a rate rise tomorrow, and investors see that as an indication that the second rate hike since the financial crisis is right around the corner.
But investors will be looking for comments from the central bank’s Monetary Policy Committee (MPC) as to whether this is the start of a series of tightening moves or, as most reckon, a one-off hike before Britain leaves the EU next March.
“I don't understand why it is looking to raise rates... There has been much less healing in the UK household balance sheet than there has been in the US Now we’re reaching this crunch point on Brexit as well,” said David Riley, chief investment strategist at BlueBay Asset Management.
There has been much less healing in the UK balance sheet than the US
“I think they are going to hike rates [tomorrow] because... Carney doesn’t like the ‘unreliable boyfriend [tag]’. I think they will do it but it will be one and done,” Mr Riley said, referring to accusations BoE Governor Mark Carney’s guidance on the path for rates has been repeatedly thrown off course by economic surprises.
The pound fell 0.2 per cent to $1.3089. Sterling traded flat vs the euro at 89.220 pence per euro.
Recent economic data in Britain has pointed to an economy that is recovering from a slowdown in the first-quarter but still struggling, with wage growth weaker than expected given low levels of unemployment and limited domestic inflationary pressures.
“It would be a major surprise if the BoE did not raise rates. The tone and tenor of any statement will be more important, the debate has moved on to whether they can do another hike and if so, when,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
Others are more wary. “While the market is convinced that Bank of England will hike firmly [tomorrow], we think either a very dovish hike or no hike at all are more likely outcomes of the meeting. We continue to dislike the pound as a consequence,” said Andreas Larsen, a strategist at Nordea Markets.