LONDON: Sterling weakened on Monday as attention shifted to a Bank of England inflation report due later this week, which is expected to support expectations that UK interest rates will stay lower for longer.
The pound was also hurt by a widening gap between U.S. 10-year Treasury yields and their British counterparts. The U.S. 10-year yield posted its biggest rise in 1-1/2 years on Friday as robust U.S. jobs data stoked expectations that the Federal Reserve will raise interest rates as early as June.
Sterling was down 0.15 percent at $1.5225, while against the euro it slipped around 0.4 percent to trade at 74.50 pence per euro. The British currency has suffered in the past few months as investors pushed back expectations of a rate hike, with markets now expecting the first monetary tightening only in early or the middle of 2016.
The Bank of England will release its quarterly inflation report on Thursday and, despite a slew of robust economic reports last week, price pressures remain soft allowing the central bank to keep rates at record lows. The BoE is likely to update growth and inflation prospects in the report.
"The BoE's already-strong views on inflation are likely to become even stronger, with the central bank likely to repeat the UK inflation risks when the quarterly report is released," said Jameel Ahmad, chief market analyst at FXTM.
Last week the BoE kept interest rates unchanged at a policy meeting. At its meeting in January two policymakers who had previously voted for rate hikes dropped their call as inflation tumbled to decade lows and wage growth remained subdued.
Investors are also likely to be cautious on the pound ahead of a parliamentary election in May that could open the door to a referendum on Britain leaving the European Union. Traders said a number of hedge funds were taking bets against the pound in the run-up to the election.
"Political risks and economic headwinds from Europe are likely to limit gains in the pound," said a London-based spot trader.
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