LONDON: Sterling slipped from almost-seven-year highs on Wednesday after the Bank of England cut its growth forecasts and warned about a strong pound's impact on the outlook for interest rates.
The UK economy has outpaced much of Europe over the past two years, and the prospect that Britain will be the first to follow any rise in US rates has kept sterling strong - a worry for exporters facing off against euro zone competitors.
But the Bank's latest quarterly Inflation Report backed market expectations that it will only start to raise rates in around a year's time.
Governor Mark Carney said there would be an impact on the economy if an increase in sterling's effective exchange rate persisted, and said the pound's strength was "relevant" for the path of interest rates.
"These comments are structured in a way that the subliminal messaging is there, and currency traders remember that it's there," said Stephen Gallo, European head of FX strategy at BMO Capital Markets in London.
"When the ECB (European Central Bank) prints money and then the UK cyclically is ahead of the euro zone, naturally the real exchange rate is going to rise.
There's not much (the BoE) can do about it but try to slow it down, and I think some of the subliminal messaging is there for that reason."
The BoE also said it now expects growth this year to come in at 2.5 percent, down from a 2.9 percent projection in February and closer to what most other economic forecasters expect.
HIGHEST SINCE 2008
Sterling had earlier powered to its highest level since August 2008 against the BoE's trade-weighted basket of currencies, gaining against both the euro and dollar, after data showed British earnings growth picked up more than expected and unemployment fell in the first quarter.
It fell back after the Inflation Report, losing one percent against the euro to trade at 72.255 pence.
Having hit a five-month high at $1.5749 after the labour data, the pound traded at $1.5714, still up 0.3 percent on the day, having been given a boost by weak US retail sales data.
Carney's comments echoed minutes from the BoE's March policy meeting, which showed that policymakers saw a risk that sterling could strengthen further and leave inflation below target for longer. Explicit comments from the bank about the outlook for sterling's exchange rate are rare.
"The report doesn't represent any significant shift (in) policy thinking. Sterling strength was mentioned but this has lost the surprise factor it held in March," said Citi FX strategist Josh O'Byrne.
"Our assessment is the report presented a muted outlook, but sterling is carrying less baggage than the dollar or euro right now, leaving room to recover (from) today's pullback once markets stabilise."
Comments
Comments are closed.