LONDON: Sterling edged lower on Wednesday as traders considered whether the British currency will be hurt by several expected interest rate increases by the Bank of England (BoE) that could put more strain on the economy.
The pound edged 0.02% lower against the dollar at $1.2713 by 0840 GMT, 1.2% below the 14-month high it touched against the dollar last month.
Against the euro, the pound was 0.14% lower at 85.60 pence, taking some distance from a 10-month high reached against the single currency last month.
Sterling steadies as traders await business data later this week
The BoE raised interest rates by half a point in June to 5%, and markets expect it to deliver an identical increase when it meets on Aug. 3.
“Sterling is again decoupling from UK rate prospects, suggesting markets are questioning the credibility of UK policy,” said Adam Cole, chief currency strategist at RBC Europe.
“Although we have serious medium-term concerns on imbalances and policy credibility in the UK, this is a difficult theme to trade tactically, particularly in thin summer markets, and we will stay neutral on GBP in the short-term,” he added.
Money markets are pricing in that BoE rates will not peak until March 2024, reaching 6.28%.
A month ago, the expectation was for a maximum of about 5.3% by the end of this year, with the first cut a few months later.
The BoE is watching economic indicators closely as it considers how many more rate hikes are needed to control inflation.
Growth in Britain’s private sector slowed sharply last month, despite businesses facing lower inflation, as higher BoE interest rates weighed on demand, a survey showed on Wednesday.
Another survey showed on Monday that the pace of decline in Britain’s manufacturing sector steepened in June and optimism faded despite weakening price pressures.
The S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to 46.5 from 47.1 in May, its lowest reading this year and one of the weakest since the 2008-09 financial crisis.
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