April 20, 2018 / 8:39 AM / 4 months ago

Sterling extends slide after Carney punctures BoE rate hike bets

LONDON (Reuters) - Sterling fell half a percent to a fresh two-week low against the dollar on Friday after Bank of England Governor Mark Carney signalled that the central bank may not raise interest rates in May because economic data was “mixed”.

Investors had this week pushed the pound, one of the best performing major currencies in 2018, to its highest level since the Brexit referendum in June 2016, in part because of growing expectations the BoE would increase rates next month to curb inflation.

But after weaker-than-expected wage growth and inflation data this week, Carney told the BBC on Thursday that a May rate rise was not a given and that there were other BoE meetings later in the year.

Markets are now pricing in a 40 percent chance of a 25 basis point rise in May, down from an almost 70 percent chance before Carney spoke.

“Carney has moved the goalposts,” said Jane Foley, an FX strategist at Rabobank. “The data from the UK has shown signs of weakness. There are signs we could be losing momentum.”

Foley said Carney was correct to have cautioned the market but his comments raised questions about the BoE’s forward guidance in February when it had signalled a rate rise was coming soon, and this underlined that investors should see rate moves as contingent on economic data.

The pound fell 0.5 percent to a day's low of $1.4008 GBP=D3, its lowest since April 6, as broad dollar strength kept the pound under pressure in late European trading.

On Thursday, sterling slid close to 1 percent and the British currency is now down 1.5 percent this week, barely holding on to gains for April, which is normally a strong month for the pound.

Against the euro, however, sterling recovered on Friday as the single currency suffered losses across the board. The pound rose 0.2 percent to 87.52 pence per euro GBPEUR=D3.

A seasonal rise in capital inflows into Britain from foreign companies paying UK shareholders dividends has boosted sterling during April in recent years.

Analysts said some speculative money had probably bet on that pattern repeating itself, and investors were now unwinding those positions, pushing the currency lower.

FURTHER DOWNSIDE RISKS

Hedge funds have amassed a $3.8 billion long bet on sterling, the biggest long position in almost four years, according to positioning data GBPNETUSD=.

“If market expectations continue to deteriorate over higher U.K. interest rates, sterling could be exposed to further downside risks,” said Lukman Otunuga, research analyst at FXTM.

Michael Saunders, a member of the BoE’s rate-setting Monetary Policy Committee who voted for a rate rise last month, said on Friday that rate increases should be gradual and not glacial.

Economists, almost all of whom had predicted the BoE would act in May before Carney’s Thursday interview, believe the central bank’s vote on rates next month will now be very close.

Progress during the next round of negotiations between Britain and the European Union over their divorce will also influence the pound.

Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

Reporting by Tommy Wilkes; Editing by Alison Williams and David Stamp

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