Sterling skids on uncertainty over BoE rate outlook

LONDON (Reuters) - The British pound skidded towards a two-week low against a stronger dollar on Tuesday, pressured by growing uncertainty over whether the Bank of England will raise interest rates next week for the first time in over a decade.

Pound coins are seen in the photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration

A Reuters poll on Tuesday found 46 of 64 economists expect the BoE to hike rates next week when it holds its next policy meeting and publishes its latest quarterly Inflation Report.

But although that is the consensus view, comments from BoE policymakers that markets have interpreted as dovish have generated scepticism among investors. And most economists in the Reuters poll said that after November’s hike, they expected no action from the central bank for the whole of next year.

BoE Deputy Governor Jon Cunliffe again raised doubt about whether he would back a rate rise next week, describing it as an “open question” in an interview published by a Welsh newspaper on Monday.

Sterling slipped as much as two-thirds of a percent on Tuesday to $1.3114, close to a two-week low of $1.3087.

“The big move we are seeing broadly is that there seems to be more of a cautious rhetoric coming out of the BoE,” said Societe Generale currency strategist Alvin Tan.

“That’s an issue for sterling because the market is generally expecting a rate hike before year end... (So) it is quite vulnerable to any drop in the market confidence about that.”

Most strategists said, though, that the main reason for the pound’s weakness on Tuesday was broad dollar and euro strength.

Against the euro, sterling slipped as much as 0.8 percent to 89.69 pence, with investors focused on a European Central Bank policy decision on Thursday.

Despite getting a modest boost from signs of progress in talks over Britain’s departure from the European Union in recent days, longer-term worries about the UK’s economy and political stability have pre-empted any major gains for the pound.

The Reuters poll found that economists saw a 30 percent chance Britain will leave the EU without a trade deal when two-year divorce talks end in March 2019, up from 25 percent in a September poll.

Investors are now eyeing third-quarter GDP data for Britain due on Wednesday for clues on the health of the economy and any doubts that may lead to about an interest rate hike.

Preliminary data is expected to show that GDP grew by 0.3 percent in the third quarter, the same slow quarterly growth as in the previous three months.

“If that number comes out weak, then the BoE probably will still hike, but what it does mean is that the market will flatten the (yield) curve even more and the pound will sell off,” said Nomura currency strategist Jordan Rochester.

Reporting by Polina Ivanova; editing by Jemima Kelly and Mark Heinrich