LONDON: Sterling retreated from a three-week high against a broadly firmer dollar on Monday, with investors fairly certain that the Federal Reserve will raise interest rates this week for the first time in a decade.
Investors were also cautious about the pound before inflation and labour market readings from the UK this week. The data comes less than a week after the BoE suggested a subdued inflation outlook in the near term was an obstacle to a rate hike and said wage growth had probably levelled off.
Traders said if the inflation and wages data undershoot forecasts, sterling could witness a bout of selling, with investors set to push back expectations of an interest rate hike even further.
Sterling was down 0.5 percent at $1.5151, having struck a three-week high of $1.5240 on Friday, with traders citing selling by Asian investors earlier in the session.
The euro was up 0.1 percent against the pound at 72.26 pence.
"The risks are skewed towards the downside for sterling/dollar this week," said John Hardy, FX strategist at Saxo Bank. "The interest rate spreads have long argued for lower sterling and while the UK data may have some impact, its the Fed's rate decision that will have a larger bearing."
While most investors are expecting the BoE not to move until late 2016, markets are more or less certain that the Federal Reserve will raise interest rates this week. That is likely to bolster the dollar and support Treasury yields.
Besides, the uncertain outlook for rates in the UK, investors are also concerned over a planned referendum on whether to leave the European Union -- known as "Brexit". Many investors are seeking to hedge their exposure in the currency options market in case Britain opts out.
In the recent past, banks like Societe Generale and Canada's RBC Capital Markets have recommended selling sterling, with the French bank predicting the pound may fall as low as $1.30 if voters vote in a referendum to leave the EU.
"Brexit talk may heat up ahead of Thursday's EU Summit, with Downing Street reiterating that Prime Minister (David) Cameron will not soften his stance on in-work benefits for EU migrants," said Viraj Patel, currency strategist at ING.
"While a deal this month seems improbable, we may receive further details on the timetable for negotiations. The option markets are tentatively pricing in higher sterling volatility beyond the second half of 2016."
Comments
Comments are closed for this article.