LONDON (Reuters) - Sterling was steady on Thursday, having pulled away the previous day from its highest level since last year’s Brexit vote result, after the U.S. Federal Reserve signalled it would hike interest rates again this year, lifting the dollar across the board.
The Fed left rates unchanged on Wednesday but signal led it still expects one more increase by the end of the year despite a recent bout of low inflation, and said it would start trimming its balance sheet from October, in a further tightening measure.
That drove up the dollar to its highest level in more than two weeks against a basket of currencies, and the pound slipped to as low as $1.3452, having reached $1.3659 earlier in the day, its highest since June 24, 2016.
The pound had until the Fed statement been building on the gains of last week, when it jumped around 3.3 percent against the dollar after the Bank of England said it was likely to hike interest rates in the “coming months”.
By 0840 GMT on Thursday, it was trading around $1.3500, flat on the day, while the dollar slipped back a touch.
“Fed policy is having less impact at strengthening the U.S. dollar in the current environment as overseas central banks are also moving closer to tightening policy,” said MUFG currency economist Lee Hardman, in London.
“Higher UK rates are supportive for a stronger pound although the risk posed by (Prime Minister) Theresa May’s keynote speech in Florence on Friday makes us somewhat cautious in the near-term, especially after the pound’s recent sharp gains,” he added.
May is expected to flesh out her vision of Britain’s future relationship with the European Union in her speech on Friday in Florence, Italy. European capitals expect her to signal a readiness to pay to stay in the single market - an issue over which her government is divided.
Analysts said sterling could suffer a knock if it appeared that May was pushing for any kind of “hard Brexit” in which Britain does not have preferential access to the single market, but that monetary tightening expectations would keep the pound supported.
A Reuters poll on Wednesday found almost two-thirds of economists now expect a BoE rate hike to come in November, though three quarters of those queried believed that tightening policy then would be a mistake.
“We are coming around to the view that the BoE may be prepared to hike interest rates once either in November 2017 or February 2018 and then sit back for a while digesting the impact on sterling and on consumption in particular,” wrote Rabobank analysts in a note to clients.
“Not only would a policy move consolidate the support provided to the pound by the Bank’s hawkish rhetoric, but it would protect the central bank’s credibility ... following so much hawkish talk.”
Editing by Matthew Mpoke Bigg