LONDON: Sterling edged up in early London trading on Monday, but analysts said concerns about economic growth and inflation limited the extent to which the British currency benefited from expectations that the Bank of England will raise rates. Money markets are pricing in a rate hike by the central bank at its meeting on Nov. 4.
However, data from the UK last week was mixed: PMIs rose as the economy unexpectedly regained momentum in October, but retail sales figures were worse than expected, sending the pound lower at the end of the week.
A record proportion of the British public thinks inflation will accelerate over the next 12 months.
"I can't persuade myself that the FX market is going to blindly buy sterling on rate hikes that are down to supply-side inflationary pressures (Brexit having made sure the UK feels these particularly sharply) against the backdrop of a dismal run of falling monthly retail sales figures," Kit Juckes, a currency strategist at Societe Generale, said in a client note.
At 0812 GMT, the pound was up 0.2% against the dollar at $1.37845, having fallen below $1.38 after the retail sales miss.
Versus the euro, it was up around 0.1% at 84.555 pence per euro.
On Friday, the trade-weighted sterling index hit its highest levels since June 2016, when it dropped sharply on the UK's Brexit vote.
Speculators switched to a small net long position on the pound in the week to Oct 19, positioning data from CFTC showed. For most of October, short positions have outnumbered long.
Some investors believe that policymakers may be making a mistake by tightening policy too quickly, making the British currency more volatile than its major rivals in recent days.
George Buckley, chief UK and euro area economist at Nomura, said that rising virus case numbers in the UK and the risk of renewed restrictions on activity during winter could push the Bank of England not to raise rates in November.
The UK's budget forecasts will be unveiled on Wednesday.
"Our initial thoughts are that this week will not see any major announcement on fiscal consolidation strong enough to prompt a more dovish re-pricing of the BoE cycle," ING FX strategist said in a note to clients.
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