April 25, 2018 / 9:10 AM / in 3 months

Sterling stuck near five-week lows as dollar bounces on yield rise

LONDON (Reuters) - Sterling fell against the dollar on Wednesday as the U.S. currency strengthened on the back of rising Treasury yields, while traders remained cautious ahead of British first-quarter economic growth numbers due on Friday.

Pound coins are seen in this photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration

The release will be the last key data issued before the Bank of England’s Monetary Policy Committee meeting early next month, and markets are split over whether the central bank will raise interest rates.

Governor Mark Carney dented confidence that a rate hike would happen when he said last week that Britain’s economic data was “mixed” and that there were several other MPC meetings later this year.

That sent sterling plummeting from post-Brexit vote highs and left it down for the month of April.

The pound did snap its losing streak and rise on Tuesday and overnight on news of a potentially positive M&A deal.

But with the dollar rebounding on Wednesday as the 10-year Treasury yield topped 3 percent, investors sold the pound.

“The price action today reflects more dollar strength than sterling weakness,” said Morten Helt, an FX strategist at Danske Bank, noting that the British currency had held up better against the euro in recent trading.

Helt said that, despite Carney’s comments, he still expected the BoE to hike rates as it followed the U.S. Federal Reserve in tightening policy and as it looked at the potential for a strong labour market to put upward pressure on inflation.

“We will have to see a very weak print (of GDP data on Friday) to delay a rate hike. We still believe in a rate hike and see sterling supported in the next few weeks.”

The pound fell 0.3 percent to $1.3938 (0.9996 pounds) as the dollar gained across most major currencies, and sterling was left close to a five-week low of $1.3919.

Sterling remains more than four cents off its post-Brexit vote highs of $1.4377 hit last week.

Some of those watching the market said the currency could fall further if more investors began to doubt a May rate hike.

“Slowing UK inflation and a cautious Mark Carney have forced investors to scale back expectations of a May rate hike. The pound, which remains extremely sensitive to monetary policy speculation, could depreciate further based on these factors,” said Lukman Otunuga, an analyst at FXTM.

Against the euro, which some analysts say is currently a better gauge, given that there has been considerable dollar-specific news this week, sterling gained 0.2 percent to 87.380 pence per euro.

Reporting by Tommy Wilkes; Editing by Kevin Liffey

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