Sterling falls on interest rate, election uncertainty

LONDON: Sterling fell against the dollar and euro on Monday, as doubts over when UK interest rates will begin to rise and uncertainty over the outcome of a national election due in early May weighed on the currency.

Bank of England Chief Economist Andy Haldane said last week the bank should be ready to cut interest rates further if inflation looked likely to fall too below its 2 percent target. The next policy move was as likely to be a cut in rates as a hike, he said.

Those comments echoed a cautious tone from the BoE's monetary policy committee in the minutes from its latest meeting, released last Wednesday, in which members flagged the impact of a strengthening pound on inflation.

Investors pushed back their expectations of when British interest rates will rise in response to the BoE's more dovish stance. Having been pricing in a hike in early 2016 at the start of last week, they now do not expect one until the middle of next year.

Sterling fell half a percent against the dollar on Monday to $1.4887, not far from a five-year low of $1.4635 touched last week after the BoE minutes. Against the euro, the pound was also half a percent lower at 72.70 pence.

Nikolaos Sgouropoulos, a currency strategist at Barclays in London, said political risks were also being priced in.

"The recent weakness we've seen ... is probably on the back of market participants further pricing in some election risk premium, particularly given how uncertain this election seems to be," he said.

"But in terms of the (longer-term) outlook it's still quite positive - you will probably get some upside surprises."

Traders will look closely at Tuesday's consumer price data, expected to show inflation sank to 0.1 percent year-on-year in February, and which some economists polled by Reuters reckon fell into negative territory.

"The one currency which looks vulnerable to weakness against the dollar this week is sterling," wrote Societe Generale analysts in a research note.

"This week's most important data will be tomorrow's CPI and if that surprises on the downside, look for more talk of rates staying on hold long after the Fed starts hiking and some talk of a possible cut."