LONDON: Sterling held steady against the dollar on Monday, as a murky economic growth outlook outweighed positive data for October ahead of the Bank of England’s next policy decision due later this week.
At 1028 GMT, the pound was down a marginal 0.07% against the dollar at $1.22750. Meanwhile, it fell 0.1% versus the euro to 86.015 pence.
Official data on Monday showed Britain’s economy rebounding in October a little stronger than expected from September, when output was affected by a one-off public holiday to mark the funeral of Queen Elizabeth.
Gross domestic product grew by 0.5% after September’s 0.6% contraction, but fears of a lengthy UK recession are still weighing on sentiment.
“The monthly output figure was pretty robust. But on a quarterly basis, output was down -0.3%, which suggests that overall the direction of travel is downward,” said Stuart Cole, head macro economist at Equiti Capital.
“The outlook going forward is looking increasingly difficult, what with CPI still rising, tax hikes and spending cuts to come next April, and interest rates/mortgage rates on the up.”
British banks and building societies expect to lend 23% less to home buyers next year, while property website Rightmove said on Friday that average asking prices for newly listed property had fallen by 2.1% this month, the largest December fall in four years.
“Given the penchant for home-owning in the UK, house prices are always a good sign of the strength of consumer sentiment and demand,” said Cole, adding that it could be a sign that people are choosing not to spend money, or that mortgages are becoming increasingly unaffordable.
The pound touched $1.2345 against the dollar on Dec. 5 – its highest since mid-June - recovering by nearly 20% from a record low at the end of September. It has fallen 9.3% in 2022, however.
Market players are awaiting the Bank of England’s (BoE) next interest rate decision on Thursday, with expectations that the central bank will raise its benchmark rate by another 50 basis points to 3.5%.
British policymakers have been hiking rates since late 2021 to try to bring down double-digit inflation, but they are increasingly split on how much tightening is needed as the economy heads into recession.
“Sterling is one of those currencies that is particularly vulnerable to a change in risk sentiment, and therefore if the market concludes that the likes of the Fed, BoE etc are continuing with their aggressive tightening in policy, exacerbating the fears of recession, then the pound will suffer,” Cole said.
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