LONDON: Sterling recovered from lows on Monday as the dollar lost ground on disappointing US retail sales data, but gains will be capped by expectations that monetary policy in Britain will remain easy in the near term.
The Bank of England (BoE) will release the minutes of its latest Monetary Policy Committee meeting on Wednesday. They are likely to retain a dovish bias after the Bank said two weeks ago that a recent rise in UK gilt yields was unwarranted.
Traders said the minutes would be the first step towards preparing investors for a pledge to keep rates low till economic recovery is underway. The guidance is widely expected to be released in early August in the Quarterly Inflation Report.
Sterling was flat at $1.5095, recovering from $1.5055 before the US data was released.
US retail sales for June came in below expectations and indicated a slower pace of consumer spending, building the case for the Federal Reserve to keep monetary policy accommodative.
Sterling's recovery kept it above a three-year low of $1.4814 struck last Tuesday, although traders cited steady selling by Middle East investors at higher levels.
Against the euro, sterling was flat at 86.45 pence per euro, off a four-month high of 86.945 pence.
"If the minutes show a shift in the balance of voting towards the doves or little dissent from committing to keeping monetary policy loose, then sterling is likely to weaken," said Mansoor Mohiuddin, chief currency strategist at UBS.
Speculators increased their bets against the pound in the week to July 9, data from the Commodity Futures Trading Commission showed on Friday. Net short positions rose to 34,259 contracts from 31,324 contracts.
Traders are likely to look past British inflation on Tuesday, with any spike in consumer prices unlikely to sway the MPC from easing policy further. Annual inflation for June is expected to accelerate to 3 percent from 2.7 percent.
"Overall we see little over this week that would argue against more BoE easing in August - a key driver of our weaker sterling call," BNP Paribas said in a note.
"We remain long euro/sterling via options and have also used the squeeze on long dollar positions last week to initiate a new short pound position, targeting $1.4500."
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