LONDON: Sterling edged down against the euro and dollar on Monday after data showed signs that tighter rules on UK mortgage lending were starting to have an effect, lessening the impetus for the Bank of England to raise interest rates soon.
Numbers released on Monday showed UK lenders approved the lowest number of mortgages for 11 months in May, showing tighter affordability rules introduced in April are dampening activity. Though total mortgage lending rose by the most since 2008, that mostly reflected past approvals and rising house prices.
Worries that the British housing market might be beginning to overheat prompted the BoE's Financial Policy Committee (FPC) to announce a cap on home loans last week and tougher checks on whether borrowers can repay their mortgages.
"Going forward from here the markets will become increasingly sensitive to any kind of evidence that in particular the FPC measures taken last week could start to have an impact in terms of slowing the market, but that's probably months away," said Derek Halpenny, European head of global markets research at the Bank of Tokyo-Mitsubishi UFJ.
Data from the euro zone showed inflation flat at 0.5 percent in June, easing immediate pressure on the European Central Bank to act again soon to tackle slow price rises, though it is still languishing in what ECB President Mario Draghi has called a "danger zone" of below 1 percent.
The euro rose to a daily high of 80.275 pence following the data from 80.195 beforehand. Versus the dollar, sterling edged down to $1.7021.
As the UK economy steadily improves, the game on the pound for the past few months has been a to-and-fro on expectations for when the BoE will raise interest rates for the first time in seven years from their current historic lows.
Charlie Bean, who steps down from his role as the BoE's deputy governor today, said over the weekend that markets were right to expect that hike to come around the turn of the year and for rates to rise to around 2.5 percent over the next three years.
Markets expect the UK to be the first of the world's five major central banks to raise hike interest rates, which has led many traders to bet on sterling.
"For a market that is struggling for direction, any currency pair where there's an obvious monetary policy divergence in place is probably where you're going to get the greatest attraction for trading from the market," said Halpenny.
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