Sterling stuck near four-month low before Bank of England rate decision

LONDON (Reuters) - Sterling held near a four-month low on Wednesday before a Bank of England meeting where interest rates are expected to be left unchanged.

FILE PHOTO: UK pound coin drops into yellow watercolour in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic/Illustration

Weak UK economic data and renewed worries about Brexit have hurt the pound in recent weeks and led markets to almost discount the possibility of interest rates rising on Thursday.

Traders will be scrutinising the central bank decision for signs of whether an increase is likely later this year. A close vote in the nine-member Monetary Policy Committee could prepare markets for a rate move in August.

Early on Wednesday, sterling dropped as low as $1.3499, close to Tuesday’s lows, its weakest since Jan. 11, then recouped some of its losses as the dollar fell.

Against the euro, sterling gained 0.3 percent to 87.325 pence as the stronger dollar pulled the single currency down across the board.

Investors have been selling pounds on expectations the BoE will not tighten monetary policy and as tensions have resurfaced over what Britain’s relationship with the European Union should look like.

“UK politics seems more dysfunctional, and that is taking a toll on the economy,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

“For a long time we thought the BoE was too optimistic on growth and upside risks to inflation, so it will interesting to see what they say in their forecasts tomorrow.”

The central bank could struggle to explain its future approach to a market that has within a month cut its expectation of a May increase from 90 to around 10 percent, analysts said.

The central bank will wait until August before raising interest rates, according to a Reuters poll of economists.

“The BoE’s hands are tied at tomorrow’s meeting and it will be a Herculean task to signal credibly to the market when it intends to implement the planned rate hike,” Antje Praefcke, currency strategist at Commerzbank, wrote in a note to clients.

However, other analysts said the pound’s fall in recent weeks looked overcooked and they remained bullish for the medium term.

“There is a lot of bad news priced into the pound right now and it would take a very soft narrative from the BoE, in our view, to force it much lower,” Philip Shaw, chief economist at Investec, said in the Reuters Global Markets Forum.

Data released late last week showed investors had cut their net long positions in the pound over the past fortnight by the biggest amount since March 2017, although net long positions remain near a four-year high.

(This version of the story fixes typo in second paragraph)

Reporting by Tom Finn, additional reporting by Kirsten Donovan and Dhara Ranasinghe, editing by Larry King