LONDON: Sterling fell against a broadly stronger dollar on Monday, as traders mulled what the Bank of England might signal at its next policy meeting amid growing confidence that the Federal Reserve will soon be cutting interest rates.
At 1156 GMT, sterling was 0.2% down against the dollar at $1.26865.
With little market-moving news out of the UK, traders remain focused on key monthly US jobs data due this week for direction.
On Monday, most currency pairs were trading in line with their relative sensitivity to dollar moves, according to Nicholas Rees, FX market analyst at Monex.
“With a limited UK data calendar, the key for sterling is going to be how markets view the divergence in central bank easing expectations between the BoE and other DM (developed market) central banks,” Rees said.
Market attention has shifted in recent weeks to when the BoE will commence rate cuts.
Sterling hits fresh 2-1/2 month high versus euro, central banks in focus
The bank rate is currently at a 15-year high of 5.25%, but with inflation starting to cool and the economy slowing, traders think rates have probably peaked.
The BoE will make its next policy announcement on Dec 14, with markets almost unanimously betting on no change.
Neverthless, Bank of England Governor Andrew Bailey last week said the central bank “will do what it takes” to get inflation down to its 2% target, adding that he had not yet seen enough progress towards that goal to be confident.
Despite Monday’s pullback, the pound remains close to its highest in around three months, driven in part by the diverging expectations for the Fed and the BoE.
Futures markets show the Fed could deliver around 130 basis points’ worth of cuts next year, while the BoE is expected to cut by just 75 bps.
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