Sterling slips back towards $1.30 as BoE rate hike bets fade

LONDON (Reuters) - Sterling edged back towards $1.30 on Wednesday, adding marginally to falls the previous day after weak inflation data poured cold water on expectations that the Bank of England will hike rates this year.

Sample polymer five and ten GB pound banknotes are seen on display at the Bank of England in London September 10, 2013. REUTERS/Chris Ratcliffe/pool

The pound rose above $1.31 to 10-month highs earlier this week as the dollar fell across the board, and as investors bet that the 25-basis-point cut in British interest rates after last year’s vote for Brexit could be reversed in the coming months.

But BoE policymakers have made it clear that any monetary tightening will be data-dependent, and Tuesday’s below-forecast consumer price numbers therefore fed doubt that rates could be tightened in the coming months.

“When I look at currencies I like to start with positioning and according to our data positioning (on the pound) is flat,” Credit Agricole strategist Manuel Oliveri told Reuters Global Markets Forum.

“This stands in contrast to last year when specs were running an extreme short position. What does it mean? It means that rising rate expectations or an improving capital flow situation is needed in order to trigger sustained currency upside or so to say to trigger fresh buying interest.”

Having priced in a more than 50 percent chance of a 2017 hike before the data, investors are now pricing in only around a 40 percent chance, according to UBS Wealth Management currency strategist Geoffrey Yu.

Even that, said Yu, looked too high, given that markets were pricing in a similar chance of a hike this year by the U.S. Federal Reserve.

Sterling was 0.1 percent lower on Wednesday at $1.3031, still not far from a high of $1.3126 touched a day earlier. Against the euro, it was a little higher at 88.47 pence, but only around a cent away from an eight-month low hit last week.

“The fact that we’re still hovering around here I think is more of a dollar story than a UK story,” said Yu. “You’re seeing where euro/sterling is trading right now.”

“I still find it very surprising that we’re thinking the UK is about as likely to hike this year as the U.S.,” he added. “The bar is higher to push sterling higher based on Bank of England pricing versus a fade of that trade, so it (sterling) is quite asymmetrically positioned right now.”

Tuesday’s numbers showed consumer prices rose by 2.6 percent in June compared with a year earlier, down from a nearly four-year high of 2.9 percent in May.

“Even though both the headline and the core rates remain notably above the target, their decline eases some pressure on the BoE to raise rates in order to curb overshooting inflation,” wrote IronFX analyst Charalambos Pissouros in a note to clients.

The market is watching developments in Brussels closely, where Brexit secretary David Davis’ team is in negotiations with the team of the EU’s Michel Barnier to get a deal for Britain to leave the bloc. Any signs that Britain could lose preferential access to Europe’s single market are likely to weigh on the currency.

Traders are also eyeing Thursday’s UK retail sales data.

Editing by Alison Williams