October 19, 2017 / 8:19 AM / in 2 months

Sterling dips against euro on BoE rate uncertainty

LONDON (Reuters) - Sterling slipped to a one-week low against the euro on Thursday after data showing an unexpectedly sharp slowdown in British retail sales added to doubts over the outlook for Bank of England interest rate moves.

The pound has been pushed lower this week by a combination of weak data and comments from BoE policymakers that markets have interpreted as dovish.

Although investors are pricing in an 80 percent chance of a rate hike next month, doubts are growing about whether the BoE will continue to tighten policy next year.

Thursday’s numbers showed retail sales volumes fell 0.8 percent in September, dragging quarterly growth to its weakest annual rate since 2013. That was below all economists’ forecasts in a Reuters poll.

The pound slipped to 89.90 pence per euro after the data, its weakest since Oct. 12. By 1530 GMT it had recovered a little, trading at 89.735 pence per euro, but that still left it down half a percent on the day.

“At the heart of today was that fairly uninspiring retail sales data - almost half of what was forecast,” said Simon Derrick, head of currency research at BNY Mellon.

“And that, coming on the back of yesterday’s comments from (Sir David) Ramsden, just added to the uncertainty with regards to monetary policy - whether we get that hike in November.”

Earlier this week, the BoE’s new deputy governor Ramsden distanced himself from the Bank’s majority view that interest rates probably needed to rise soon, while another newcomer said her support for that position was “very contingent on the data”.

“We are doubtful that there will be two (rate hikes) by the end of next year,” said Societe Generale currency strategist Alvin Tan.

“The BoE has dropped enough hints to show that it is pretty serious about taking back the rate cut that was put in after the Brexit vote. So I think that one hike will happen, most likely next month, but we are still sceptical about a second hike at the start of next year.”

Tan said the next major data point for sterling will be next week’s third-quarter British GDP.

Sterling also fell to a one-week low against the dollar after the retail sales numbers, but it recovered as the greenback weakened across the board, trading flat on the day at around $1.32.

Though investors were eying an ongoing European Union summit where British Prime Minister Theresa May was trying to revive stalled Brexit talks, sterling’s movements appeared to be driven more by BoE expectations than political news, with little in the way of major new developments in Brussels.

Reporting by Jemima Kelly and Polina Ivanova; Editing by John Stonestreet and Hugh Lawson

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