LONDON: Sterling handed back early gains against the euro on Wednesday after Bank of England Governor Mark Carney said inflation was likely to dip below 1 percent, adding to growing doubts about whether the bank will raise interest rates next year.
The pound has been driven lower since July chiefly by an adjustment in market expectations for the first rise in rates, now seen late next year or even early in 2016 compared to earlier forecasts of a rise early in 2015.
It has improved against a basket of currencies over the past month and in general traders say the tone is steadier. But it still looks subject to risks from the economic and political outlook over the next six months.
"Rate expectations have come a very long way and people may think that sterling has even gone a little too far," said Paul Robson, a strategist with RBS in London.
"We are still negative on the pound over the next six months, however. I think some people may be surprised at the extent of the economic slowdown at the start of next year."
Carney said interest rates would need to rise at some stage to keep inflation in check, but he said any moves were likely to be more gradual and limited than in the past and markets were most impressed by his prediction that inflation would fall further in months to come.
By 1021 GMT, sterling was 0.1 percent lower at 79.05 pence per euro and flat against the dollar at $1.5670.
"While we are dollar bulls, we think the Fed will wait until late next year before raising interest rates and there is the potential for pullbacks on cable," said Jane Foley, currency strategist with Rabobank in London.
She saw the pound broadly steady in a range of $1.56-1.59 per dollar over the next few months, playing down the risks from the run in to next May's parliamentary elections, currently too close to call.
"Politics is such a big event risk in emerging economies but in a developed economy like the UK, do investors really differentiate between which political party will be in power?" Foley said.
"I'm not saying we definitely won't see a political shakeout in the first quarter, I just don't think it will happen."
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