Sterling hits 10-month low versus euro as BoE and ECB rate paths diverge

LONDON (Reuters) - The British pound slipped to a 10-month low against the euro on Monday, as investors bet the Bank of England would keep interest rates at record lows for the coming months, while the European Central Bank moves towards tightening.

Pound coins are seen in front of displayed stock graph in this picture illustration taken June 9, 2017. REUTERS/Dado Ruvic/Illustration

Sterling had been supported in recent weeks by the view that the BoE would hike rates - perhaps even by the end of this year - after policymakers at the Bank made a series of hawkish comments.

But despite BoE rate-setters last week trying to drive home the message that interest rates are likely to rise, the market chose to focus on their 6-2 vote to keep rates on hold, down from 5-3 in the last meeting, as well as downward revisions of growth and inflation forecasts.

The ECB, meanwhile, is set to reconsider its monetary stimulus programme in the autumn. Core inflation in the currency bloc unexpectedly accelerated to a four-year high last month while unemployment has fallen to its lowest since 2009.

Sterling slipped to 90.61 pence per euro on Monday, its weakest since October. The Bank of England’s trade-weighted sterling index also fell to its lowest since the middle of March.

Bank of New York Mellon strategists warned that sterling’s falls could be set to accelerate.

“It is evident that we have squashed volatilities, and that constitutes a coiled spring ... At the moment the risks seem to be skewed to the downside,” said Neil Mellor, a strategist at the bank.

Against the dollar, sterling was down 0.1 percent at $1.3025, having pulled away from an 11-month high above $1.32 at the end of last week.

“We were suspicious about sterling getting up to the $1.32 level - we thought it was living on borrowed time,” said Mellor. “The market took the June MPC (monetary policy committee) vote and ran with it, and that looked a bit incongruous.”

Data on Friday showed speculators increased their bets against the pound for a second week up to last Tuesday, before the Bank of England’s rate decision. [IMM/FX]

Sterling recorded its biggest daily falls against the dollar in more than six weeks on Friday, after a stronger-than-expected U.S. labour market report brought forward expectations for more interest rate hikes from the Federal Reserve, sending the dollar soaring.

EU Budget Commissioner Guenther Oettinger told a newspaper over the weekend that Britain will have to keep making payments for long-term programmes to the European Union after it leaves the bloc in 2019 - until at least 2020, he said.

But Nomura currency strategist Jordan Rochester said sterling had become less sensitive to Brexit developments.

“The pound has developed some sort of thick skin - or it’s got its fingers in its ears - when it comes to Brexit noises,” he said. “(But) until real interest rates start rising, either via a more hawkish Bank of England or lower inflation expectations, (the pound) will remain subdued.”

Reporting by Jemima Kelly, editing by Alister Doyle