LONDON: Sterling held steady against the dollar and hovered near a two-year high against the euro on Wednesday, with investors focusing on the UK economy and rate expectations again after staying away in recent weeks on political uncertainty.
Bank of England Governor Mark Carney is set to speak in Wales on Thursday and he could reiterate that interest rates will be raised in the spring of 2015. With the Scottish referendum out of the way, traders said one more obstacle to a rate hike has now been removed.
Sterling was steady against the dollar at $1.6385, well above the 10-month low of $1.6052 struck just days before the Scottish referendum. The euro was flat 78.44 pence, not far from a two-year low of 78.10 pence struck after Scotland voted to stay in the union late last week.
Traders said the overall tone was cautious, given the uncertainty over constitutional changes that the Scottish vote triggered. As the general elections approach in May, a debate regarding providing more powers to Scotland in combination with changes to English MPs only voting on English issues is set to take centre stage.
In other words, if the opposition Labour Party forms a national government in 2015 with the support of non-English MPs, it could face major problems passing legislation applicable only to England if it had no majority amongst lawmakers from England.
Until there is more clarity, sterling will struggle to make much headway, analysts and traders said.
"Once it is clear what kind of independent political power Scotland will be given and investors have finally received a clear time frame from the BoE for a rate rise, I see the potential for this pair to return to 1.70 by the end of the year," said Jameel Ahmad, chief market analyst at FXTM.
Sterling's gains are likely to be more pronounced against the euro. German business sentiment dropped for a fifth straight month in September to its lowest level since April 2013 keeping alive the prospect of further monetary easing by the European Central Bank.
In contrast, investors are expecting the BoE to tighten monetary policy early next year.
"We agree with February in terms of the date (of a BoE rate hike)," said Ian Winship, head of sterling bond portfolio at Blackrock.
"It's a fair enough distance from the general election to be a political issue and you'll also have had the February inflation report. In terms of market pricing, there's about 65 percent probability of a 25 basis point rise price in. The focus after that will be the trajectory of policy normalization."
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