02102016Wed
Last update: Wed, 10 Feb 2016 11am

Sterling plummets against dollar

Sterling fell sharply against the dollar on Thursday after dovish comments by a Bank of England policymaker cast doubt on investor expectations of an interest rate hike early next year. BoE Chief Economist Andy Haldane said the chances of an interest rate rise or cut were evenly balanced and that policy needed to stand ready to move in either direction in order for the bank to meet its 2 percent inflation target.

That echoed a cautious message from the bank's monetary policy committee in the minutes from its latest meeting, in which members flagged the impact of a strengthening pound on inflation. That led to a push-back of rate rise expectations, and investors pegged those bets back further after Haldane's comments, to some time around the middle of next year.

The pound fell to $1.4710 after the comments, leaving it down 1.8 percent on the day. Against the euro, the pound pared gains to trade at 72.21 pence, still up 0.4 percent on the day.

"The comments (from Haldane) are probably adding to the renewed softness in sterling but that needs to be put in context of the broader dollar view," said Ian Stannard, head of European FX strategy with Morgan Stanley in London.

"Cable (sterling/dollar) has come down very much ... after the spike we saw yesterday following the Federal Reserve meeting," he said.

The Fed issued a statement on interest rates that was more cautious than expected after its policy meeting on Wednesday. It removed a reference to being "patient" about raising rates but also lowered its forecasts for economic growth and inflation and reduced its interest rate trajectory.

That sent the dollar lower across the board on Wednesday night, with sterling gaining 1.5 percent on the day against the greenback - its biggest rise in 5-1/2 years.

Some traders said they expected sterling to remain weak against the dollar after markets had digested the surprisingly dovish message from the Fed.

And political uncertainty is not being fully factored in by the market, meaning the pound could fall further, Stannard said.

"We are still bearish on sterling - we think the election risks are still not fully priced in. There are several outcomes that can result from the vote but the most likely outcomes will lead to a more challenging policy environment for sterling." Britain holds a parliamentary election on May 7 and the latest opinion polls point to a 'hung parliament', in which no single party can form a government on its own.

"European Central Bank policy is pushing down European yields, which has papered over pre-election jitters in Britain," said Jane Foley, senior currency strategist at Rabobank in London. "We will see it affecting sterling as election day approaches, however."

Copyright Reuters, 2015