Sterling holds at 7-month lows as trade war concerns weigh; central bank eyed

LONDON (Reuters) - Sterling plumbed a seven month low on Tuesday, as concerns about an escalating trade dispute between the world’s two biggest economies weighed on risk appetite.

The new polymer 5 pound Sterling note featuring Sir Winston Churchill, is unveiled at Blenheim Palace in Oxfordshire, Britain June 2, 2016. REUTERS/Joe Giddens/Pool

With all eyes focused on the Bank of England’s policy decision on Thursday, in which it is expected to unveil its monetary policy stance for the rest of the year after a run of mixed data, investors have cut bets on the British currency.

“While there is little doubt that the committee will retain the current level of monetary accommodation, this meeting remains a significant gauge for markets to assess when it will be seeking to raise rates once again,” said Joshua Mahony, a market analyst at IG Group.

Market expectations are for a less than 40 percent likelihood of the Bank of England raising interest rates by August, with about an 80 percent chance of one more rate hike by the end of 2018.

Sterling extended losses to fall 0.6 percent on the day at $1.3151, its lowest since late November. It has fallen a cumulative 0.8 percent over the past two sessions.

Perceived safe havens such as the Japanese yen and the Swiss franc received a boost against the dollar, though the greenback was broadly stronger against a basket of currencies after U.S. President Donald Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, ratcheting up a trade dispute with Beijing.

Commerzbank strategists said if the trade dispute were to escalate further, the dollar would be the ultimate beneficiary because costlier imports would push inflationary pressures higher, forcing the U.S. Federal Reserve to raise interest rates quicker than expected.

Against the euro, sterling was broadly flat around 87.84 pence.

No economists polled by Reuters expect the BoE to raise rates on Thursday, and some are getting cold feet about their forecasts for a rate rise in August, which would be only the central bank’s second increase since the 2008 financial crisis.

Latest Brexit headlines offered no support.

Prime Minister Theresa May’s Brexit plans were rejected by parliament’s upper chamber on Monday, setting up a confrontation with pro-EU lawmakers later this week which will test her ability to lead a minority government.

Reporting by Saikat Chatterjee; Editing by Catherine Evans and Peter Graff