LONDON (Reuters) – Britain’s pound weakened on Monday, marking its first three-day fall against the dollar this year and putting it on the back foot ahead of Thursday’s first Bank of England meeting of 2017.
“Super Thursday” will see the central bank, which cut interest rates to a record low of 0.25 percent after the June referendum on EU membership, present its quarterly inflation report along with its decision on monetary policy.
Inflation has accelerated as sterling has shed 12 percent since the Brexit vote on a trade-weighted basis. This has led to market talk that the BoE may take a more hawkish tilt and even signal that it is moving closer to raising rates from their current record low of 0.25 percent.
A Reuters poll last week, however, found most economists expect the BoE to leave its rates and other stimulus measures unchanged at least until 2019. Even though it is likely to raise its growth forecasts, uncertainty over soon-to-start Brexit negotiations mean it will likely remain cautious.]
“(Bank of England Governor Mark) Carney will probably reiterate his line that there are limits to tolerance of above-target inflation,” said BNP Paribas currency strategist Sam Lynton-Brown.
“If that rhetoric occurs at the same time of potential upward revisions to growth forecasts and maybe even inflation forecasts, that will prompt the market to increase its pricing for the probability of a Bank of England rate hike by the end of this year.”
Sterling slipped off a five-week high of $1.2674 at the end of last week, and by 1545 GMT on Monday had fallen another 0.2 percent on the day to $1.2525, as worries over a travel plan implemented by U.S. President Donald Trump drove a risk-off mode across markets.
Against a broadly weaker euro, the pound inched up 0.1 percent to 85.13 pence, close to a four-week high.
Crédit Agricole FX Strategist Manuel Oliveri forecast sterling would struggle following a recent mini-rally, with Brexit uncertainty to remain the main driver and data also likely to weaken.
“We don’t think the (BoE) inflation report will be a big shock,” he said. “It may sound a bit more hawkish but it still remains cautious.”