Sterling slipped to its weakest in almost five months against the dollar on Tuesday, with traders eyeing a speech by the head of the Bank of England later in the day for clues on when UK interest rates might start to rise. The pound fell as much as 0.4 percent to $1.5128, its weakest since early May, as investors bet the Federal Reserve will raise US interest rates well before the BoE.
Sterling recorded its worst week against the greenback in six months last week after Fed Chair Janet Yellen revived bets that US interest rates would be hiked for the first time in almost a decade by the end of 2015. Against the euro, the pound was 0.1 percent weaker on the day at 74.13 pence, having earlier hit a near-five-month low.
That was despite German inflation falling below zero for the first time in eight months, adding to the case for the European Central Bank to take further action to stimulate the economy. "There seems to be a complete refusal of the market to price in anything like the interest rate profile that central banks are trying to convey ... for all the ECB tries to talk up the prospect of more QE, and Carney talks about higher rates," said RBC Capital Markets' head of FX strategy, Adam Cole.
The BoE is expected to follow the Fed with a rise in interest rates from their current historic lows. But with UK inflation stuck at zero, the BoE is in no hurry, and investors do not expect an increase until the second half of 2016, making the dollar a more attractive currency. BoE Governor Mark Carney is due to speak at 1915 GMT.
"We still think the pound is overvalued," said Barclays currency strategist Hamish Pepper. "The UK faces very tight fiscal policy in the years ahead, so the point at which the UK moves rates higher is probably going to be later in that environment than it would be otherwise." "And that environment is going to exist alongside the uncertainty which the referendum (on whether Britain should leave the European Union) will bring which we don't think is fully priced. All of that together we think is something that will weigh on the pound versus the dollar."
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