LONDON: The pound was slightly lower against the dollar and the euro on Tuesday not far from five-week lows touched last week, as fading rate hike expectations weighed on sentiment. Sterling fell sharply after the Bank of England surprised the market by leaving interest rates unchanged last week.
According to the National Institute of Economic and Social Research (NIESR), Britain's economy risks stagnation and sticky inflation over the coming years due to supply-chain bottlenecks and headwinds from Brexit.
ING analysts expect more subdued trading into Thursday's release of UK 3Q GDP data. Still, they predicted "a broad $1.34-1.38 range will last into year-end," saying "the speculative community did not have enough conviction for driving it below the September support levels."
The pound fell 0.2% to 85.59 pence against the euro by 1500 GMT. It was down 0.1% against the dollar at $1.355, off a $1.3425 five-week low hit on Friday. Unicredit analysts said the sterling "needs to break fully beyond 1.36 (against the dollar) to convince markets to return long ahead of the mid-December BoE meeting."
Markets are assigning an around 50% probability of a rate hike in December, while before the BoE meeting, they had priced two rate hikes by year-end.
"What surprised us from the BoE last week was the strength of their dovish tone. It wasn't only that they didn't hike, they were also dovish about future hikes," BofA analysts said in a research note.
They added that their "proprietary BoE mood indicator, based on natural language processing of BoE minutes and which we update here, backs up our subjective impression. It fell back to the least hawkish since May."
Potential new spats with Ireland and France about the post-Brexit trade deal added pressure to the pound. British Brexit minister David Frost and French European Affairs Minister Clement Beaune spoke on Tuesday about issues including fishing and post-Brexit trade and agreed to talk again this week.
Ireland said on Sunday the British government appears ready to invoke unilateral emergency provisions in its Brexit deal governing Northern Ireland's trading arrangements.
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