LONDON: Sterling fell to a one-month low against the dollar on Wednesday, while gilt futures soared after the Bank of England doused expectations of near term monetary tightening.
Sterling fell to a one-month low of $1.6759 after the British central bank released its quarterly inflation report from around $1.6820 beforehand, as investors who had put bullish bets on the currency cut positions.
"Clearly some market participants got ahead of themselves in expecting rates hike by the BoE later this year," said Commerzbank currency strategist Peter Kinsella. "The drop in the pound is seeing some of those positions being flushed out."
In the report, the BoE said it remained in no rush to raise its benchmark interest rate from a record low 0.5 percent and still saw borrowing costs rising in about a year's time.
The pound had hit a near five-year high of $1.6997 last week as some investors and analysts priced in a late 2014 rate hike. The BoE lowered its unemployment forecasts for the next two years, but growth and inflation predictions were little changed. It also noted that sterling appreciation was putting downward pressure on inflation.
Governor Mark Carney told a press conference that the timing of a rate hike will depend on how fast the economy picks up, particularly the degree of slack and the outlook for inflation.
The euro rose to a session high of 81.84 pence following the report's release from around 81.59 beforehand, having slid to a 16-month low of 81.28 pence on expectations the European Central Bank will ease policy as soon as next month.
The fall in the pound reflected repricing of rate hike expectations, traders said. Sterling overnight rates dipped across the 2014/2015 strip as investors pushed back bets on when British monetary policy will be tightened.
The sterling overnight interbank average (SONIA) curve showed investors pricing in a rate hike in 10 months' time, out from nine months early in the session.
British June gilt futures extended gains after the BoE report, and were last up 42 ticks on the day at 110.76. Jobs data also weighed on sterling, traders said.
A Wednesday release showed Britain's unemployment rate fell to its lowest level in more than five years in the first quarter of 2014, but the number of Britons claiming out-of-work benefits fell by less than expected.
Traders also noted that wage growth was lower than expected, reducing the pressure on the BoE to raise rates.
Average weekly wage growth was 1.7 percent, disappointing expectations of a 2.1 percent rise. Excluding bonuses, wages actually slipped in March to 1.3 percent from 1.4 percent in February.
"Although headline wage growth is still above consumer price inflation, the fact that wages made no headway in March suggests that the recent increase was a flash in the pan, and not the sign of a sustained trend," said Kathleen Brooks, research director at Forex.com.
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