LONDON: Sterling slipped against the dollar and the euro on Wednesday with investors positioned for further weakness on expectations the Bank of England governor will reaffirm his intention to keep interest rates low until end-2016.
Many anticipate that, in a speech in Nottingham later in the day, Mark Carney will try and talk down a sharp rise in UK money market rates following a run of strong economic data.
He is likely to reiterate that the bank rate will stay at a record low of 0.5 percent until the jobless rate falls to 7 percent which the bank does not anticipate happening until end-2016. The bank formally made the link in a forward guidance plan in early August.
Sterling overnight interbank average rates (SONIA) are pricing in a first hike by around mid-2015 while some investors moved out of British government bonds with yields on the 10-year gilt rising to a fresh two-year high of 2.804 percent.
The spread over German Bund yields is at its highest since mid-2010 and the spike in market rates has broadly helped sterling. The pound is up 2 percent against the dollar and has gained 1.5 percent against the euro so far this month.
"The effective tightening of monetary policy cannot be what the BoE had in mind when it chose to pursue forward guidance," Alvin Tan, currency strategist at Societe Generale.
"Carney will get a chance to push back against the market, and we are likely to hear a more robust assertion of lower rates for longer."
On the day, sterling was down 0.2 percent at $1.5515 , not far from Tuesday's two-week low of $1.5482. The euro was slightly higher at 86.25 pence with traders saying month end demand for euros from a euro zone central bank was likely to help the single currency.
Morgan Stanley strategists said that a further clarification of the guidance plan by Carney could see the pound come under pressure.
"A move below $1.5425 would open the way to $1.5265 initially," they said in a morning note.
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