(Repeats, without changes, story first published on Tuesday)
By Patrick Graham and Jemima Kelly
LONDON Aug 12 Over five tough summer weeks
investors have slashed their bets on a stronger pound by 75
percent as still-miserly earnings growth calls into the question
the timing of the first UK interest rate rises in over seven
Sterling's retreat - around 2.3 percent, or almost 4
cents, against the dollar since early July - has come chiefly
via a rebound for the U.S. currency. But UK data, albeit only
slightly weaker, has also had an impact, casting at least some
doubt on once-popular bets that rates would rise this year.
CFTC data shows speculative investors have cut net long
positions in sterling from more than 52,000 contracts in late
June to just over 12,000 in the first week of August.
The Bank of England has said little to bolster expectations
rates will rise this year and even if minutes from its most
recent monetary policy meeting later this month reveal the first
vote for an immediate hike, money markets are only pricing in a
small chance of higher rates by the end of the year.
That is not to say the G7's fastest-growing economy will not
soon need to be cooled off a bit - a Reuters poll on Tuesday
showed economists slightly increased their bets on a rate rise
by the end of the year. But the consensus remained for it to
come in the first quarter of 2015.
Deeper-rooted doubts are emerging among market participants
and, it seems, policymakers too, about the labour market,
inflation and the solidity of Britain's economic upturn.
While the BoE's quarterly inflation report due on Wednesday,
with the accompanying tweak in the bank's view on inflation and
growth, should take centre stage this week, wage numbers the
same day - forecast to show an outright fall in earnings - may
prove just as influential.
"Policy in general in the developed world will continue to
be kept looser than it ever had in times past and I don't think
the BoE is any exception to that," said Simon Derrick, head
currency strategist at Bank of New York Mellon, adding that
rates could be kept on hold until after May's general election.
The majority, who have backed sterling's rally since the
start of last year, still foresee an earlier hike and the pound
remains significantly stronger against the euro and its
trade-weighted currency basket than against the dollar, down
just 0.5 and 0.7 percent respectively in the same five-week
Only five of the 55 economists polled by Reuters last month
said the bank would wait any longer than its next inflation
reports in November of this year or February of next.
But the tone among strategists forecasting a rise in that
time frame is cautious. Overnight interest rates traded for up
to one year, and forward rate agreements - which have been
closely correlated to sterling in the past year - show the
market pushing the first hike back into 2015.
"I suspect that they (BoE policymakers) won't hike this
year, and the reason is their inflation forecast, which is
ultimately what they're supposed to be forecasting and
targeting," says Paul Lambert, head of currency at Insight
Investment in London, which manages $485.4 billion of assets.
"I don't think it looks at this stage like they need to
raise interest rates to hit their inflation target, and that's
because wage growth is still very modest, and because inflation
has tended to undershoot rather than overshoot."
Inflation in June was 1.9 percent, below the bank's 2
The other big issue, which U.S. authorities also have to
confront again in the next year, is how to rein in ultra-loose
monetary policy which may have left many markets overextended.
A sell-off in emerging markets in January was a warning of
the impact tighter U.S. policy could have on riskier investments
worldwide. In Britain's case, the main concern is the housing
market, where rate hikes have shocked the system in the past.
On the other hand, if rising house prices - and not
improving consumer buying power - has been one of the major
sources of expansion over the past year, then the past couple of
months have shown the first signs of the market wobbling.
Most economists predict economic growth rates have peaked
and that inflation will stay low for the near future. Analysts
from U.S. investment bank JPMorgan say investors are already
paying attention to weaker trends in production and a "less
frenetic" housing market.
"Tactically, the pound is vulnerable from investors looking
to scale back their collective long positions in the currency in
response to more uneven economic data," they said in a note to
clients this week.
"UK rate expectations declined moderately over the past
month and there probably needs to be a material acceleration in
reported wage growth before the curve can price faster rate
While many analysts shy away in public from the political
context of any decision by the bank, sticking to the dogma that
it is independent of external influence, Insight's Lambert says
the bank will also seek to avoid a move close to the polls.
"All independent central banks tend to try to avoid shifting
policy too close to an election," he said. "But if they felt
they needed to, and the evidence suddenly changed markedly...
then they would."
(Writing by Patrick Graham; Editing by Ruth Pitchford)