Sterling weakened this morning against the US dollar with investors fixed on the likelihood of an interest rate rise from the Bank of England today.
The pound fell by 0.33 per cent at the time of writing against the dollar to hit its lowest since the end of last week, at $1.307.
Economists overwhelmingly expect the Bank to raise its base rate, bank rate, today by 0.25 percentage points, to take it back to 0.75 per cent. However, with markets pricing a hike as near-certain, investors’ attention will be trained on the Bank’s outlook for further moves and it judgements on the risks facing the British economy.
Viraj Patel, foreign exchange strategist at ING, said: “We feel a 25 basis point rate hike that is virtually priced in today will be softened by a more dovish and guarded BoE policy message – which could see the pound falling back to 1.30 versus the dollar, not least as the focus shifts to a tricky few months of Brexit politics.”
Many City economists have said that Brexit uncertainties are a key reason to hold back from tightening the money supply as the UK economy ventures into the biggest trade shake-up in decades.
However, the Bank’s economists have repeatedly emphasised that wage pressures in the British economy are finally picking up speed, raising the prospects for higher inflation in the coming months.
Consumer price index (CPI) inflation has remained above target for 17 consecutive months, mainly because of the depreciation of sterling following the Brexit vote in June 2016. However, it has fallen back steadily since the end of last year.
Jordan Rochester, a forex strategist at Nomura, said investors will look for tweaks to the Bank’s inflation forecasts, the tone of governor Mark Carney‘s remarks in a press conference, and the vote split on the monetary policy committee.
The Bank is also expected to publish its estimate of the equilibrium real interest rate, the rate at which monetary policy is neither stimulative or contractionary.
Miles Eakers, chief market analyst at forex firm Centtrip, said: “The Bank of England is almost certain to raise interest rates today, but the clouds of Brexit uncertainty could mean that any gains in sterling are short-lived.
“I expect policymakers to vote by just 6-3 in favour of raising rates, and the pound will weaken in response. Only a more definitive vote and comments from Mark Carney indicating another rate rise this year could see a sizeable move higher for sterling.”
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