May 2, 2019 / 8:28 AM / 22 days ago

Sterling knocked off kilter as BoE holds rates citing Brexit

LONDON (Reuters) - Sterling slipped from a two-week high on Thursday after the Bank of England lifted its growth forecasts but warned Brexit continued to cloud the outlook for monetary policy.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier

The BoE voted unanimously to keep interest rates steady at 0.75 percent but stuck to their view tighter policy would be needed in future.

Some analysts were surprised at how small the moves in the pound were, especially as Bank of England Governor Mark Carney struck a hawkish tone, warning investors against underestimating how much interest rates could rise.

One explanation is that cross-party Brexit talks - and hopes for a breakthrough - remain the main driver for the currency.

“Sterling is not reacting to the bank’s latest decision; the pound takes its orders from Westminster, not the City at the moment,” said Jeremy Cook, head of currency strategy at WorldFirst in London.

Sterling has traded in a narrow range of $1.28-$1.30 since Britain last month pushed its scheduled departure from the European Union back from March until Oct. 31.

But the currency hit a two-week high on Tuesday and has been nearing $1.31, helped by comments from Prime Minister Theresa May suggesting a rapprochement in talks with the main opposition Labour Party.

After the BoE decision, the pound initially broke higher before dropping to a day’s low of $1.3019, down 0.2 percent on the day. It weakened slightly against the euro to 85.79 pence.

The BoE upgraded its forecast for growth in the world’s fifth-largest economy to 1.5 percent, up from the decade-low 1.2 percent it predicted in February.

“The sterling-dollar pair moved lower because the decision doesn’t show any hawkish member in the committee,” said Naeem Aslam, chief market analyst at TF Global Markets (UK) Ltd in London.

The delay of Brexit removed the immediate risk of a disruptive, no-deal British departure which hung over the BoE at its last meeting in March, but extends a period of economic uncertainty.

There is still little clarity about when, how, or even if, Brexit will happen.

With Japan out for a week of holidays, traders are worried that the absence of Tokyo, one of the world’s top five currency trading centres, might fuel some exaggerated moves in foreign exchange markets.

Overall volatility in the currency markets remained near five-year lows.

Despite the pound’s gains against the dollar, net positions by hedge funds in sterling slipped back into negative territory, according to the latest data.

Reporting by Tom Finn; Editing by Alison Williams

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