LONDON: Sterling was subdued on Monday on growing expectations the Bank of England will step in to cool the UK housing market, giving it more leeway to keep interest rates lower for longer to support recovery in other parts of the economy.
BoE Governor Mark Carney at the weekend gave his strongest warning to date about the risks of a housing bubble and said the central bank was looking at new measures to control mortgage lending in a market which is short of supply.
British house prices have risen about 10 percent in the past 12 months. That has put the spotlight on the BoE's ability to prevent a bubble forming without raising rates sooner than it was planning for fear of derailing the recovery in the wider economy.
Many believe the BoE's Financial Policy Committee could tighten mortgage lending rules when it meets on June 17.
That would ease the pressure on the bank's Monetary Policy Committee (MPC) to raise interest rates and could hurt sterling in the short run. Currently, traders are pricing in the chance of a rate rise in the first quarter of 2015.
Against a broadly struggling dollar, sterling rose 0.1 percent to $1.6825, well below recent near-five-year highs of $1.6997. It was down against the euro, with the single currency up 0.1 percent at 81.55 pence.
"We maintain a tactical short sterling/dollar position," Morgan Stanley analysts said in a note. "In the $1.6650/30 area, we would look to switch back to bullish strategies."
Signs that a proposed merger between British drugmaker AstraZeneca and its U.S. counterpart Pfizer may well not go through was also weighing on sterling. Completion of the merger would mean Pfizer having to buy pounds to pay British shareholders, hopes of which had helped the pound.
DATA AND BOE MINUTES EYED
Minutes from the MPC's latest meeting and April CPI inflation data are due in the coming week.
"Sterling bulls are hoping that MPC hawks including (Martin) Weale may start voting to increase the BoE's base rate," said Mansoor Mohiuddin, head of currency strategy at UBS.
"The minutes will be closely followed to see if all nine MPC members continued to vote for unchanged policy. But the UK data isn't showing inflation picking up, despite the strength of the economic recovery."
April inflation data is due on Tuesday. Annual inflation is expected to rise to 1.7 percent from 1.6 percent a month earlier, still well below the BoE's target of 2 percent. A lower-than-expected number would add to expectations that the BoE will keep rates low.
"It could encourage more investors to take profit on the pound's climb in 2014 should the figures indicate that UK rates will remain at record lows for some time yet," said Nawaz Ali, currency analyst at Western Union.
Last week the BoE's quarterly inflation report and accompanying remarks by Governor Carney suggested a rate hike may not happen quite as soon as many had anticipated.
Still, the UK economic picture painted by recent data was brighter than that of the euro zone and United States, analysts said, making the pound attractive whenever it retreats.
British government bond futures edged lower. The 10-year gilt yield was last up 2.5 basis points at 2.588 percent, having last Thursday hit a nine-month low.
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