Sterling heads for biggest drop in two weeks as dollar rebounds

LONDON (Reuters) - Sterling fell on Wednesday as the dollar rebounded, on track for its biggest daily drop in nearly two weeks, as imminent Brexit talks and doubts the Bank of England will raise interest rates at all this year darkened the outlook for the pound.

A British Pound Sterling note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

The dollar gained as trade-related worries eased after the U.S. administration softened its approach to Chinese investment. Most of its gains came against the euro and the Swiss franc [FRX/]

Bank of England Governor Mark Carney on Wednesday said that British banks were fully prepared for a disorderly Brexit but shed little light on whether the central bank would raise rates at its next policy meeting, in August.

“Carney’s warnings that there would be turmoil if an agreement is not reached before the UK leaves the EU is putting some pressure on sterling,” said David Madden, a market analyst at CMC Markets in London.

The pound extended losses and fell 0.7 percent to a one-week low at $1.3127 as the dollar strengthened. Against the euro, it fell 0.1 percent to trade at 88.12 pence, an 11-day low.

Investors are pondering whether a rate hike is still likely this summer after an incoming BoE policymaker expressed caution over the impact of Brexit on Britain’s economy.

Sterling has been caught between contrasting signals from policymakers over whether the economy is performing well enough to justify raising rates for only the second time since the 2008-09 financial crisis.

The pound rebounded from seven-month lows last week after a BoE meeting raised expectations rates would rise in the coming months.

Markets still see more than a 50 percent likelihood the BoE will raise rates by 25 basis points in August and around a 90 percent chance of an increase by the end of 2018.

But analysts said that the window for a hike could close after August as Britain works out how to exit the European Union and policymaker John Haskel replaces the hawkish Ian McCafferty on Sept. 1.

“Sterling is likely to remain a candidate for sudden exchange rate moves as a result of news flow on Brexit and the BoE,” Antje Praefcke, an analyst at Commerzbank, wrote in a note to clients.

Sterling traders also remain cautious before an EU summit this week at which Britain is hoping to make progress in securing a favourable Brexit deal with the EU.

Reporting by Tom Finn; Additional reporting by Saikat Chatterjee; editing by Larry King