Sterling edged higher against a weakening dollar and was barely changed versus the euro on Wednesday ahead of US inflation data that may offer insight into the Federal Reserve’s monetary tightening path.
Analysts said the pound would be capped by markets scaling back overly hawkish expectations about the Bank of England’s policy stance and by uncertainty around the British economic outlook.
Money markets were pricing in around 105 basis points (bps) of Bank of England rate hikes by year-end, from 120 bps late last week and around 145 bps at the end of April.
Expectations for rising interest rates usually boost the value of a currency.
“Sterling is the easier short because the rate hikes are priced in, the slowdown is happening before our eyes, and the political backdrop is a threat to sterling too,” SG forex analysts said.
Britain is on course to enter a technical recession in the second half of this year, an economic think-tank said on Wednesday.
At 0808 GMT, the pound was down 0.2% against the US dollar at $1.2344, just above its lowest level since June 2020, which was $1.2262, reached on Monday.
The dollar index, which measures that currency versus six others, slipped slightly, but was still not far from the high of 104.49 reached at the beginning of the week for the first time since December 2002. Sterling was down 0.01% versus euro at 85.5 pence.
“We expect further range trading (today), although politics is never far from sterling and could weigh on it at any time,” ING analysts said, mentioning risks of UK-EU trade relations deteriorating again. Britain said on Wednesday it would not shy away from taking action to resolve post-Brexit trade tensions in Northern Ireland as it rejected European Union proposals to resolve a standoff on the matter.
Britain wants a full overhaul of the agreement. It has hinted at the possibility of unilaterally suspending part of it if no new deal can be reached with the EU, which is looking for changes within the terms of the existing deal.