Sterling falls vs euro and dollar, focus on BoE

© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

By Stefano Rebaudo

(Reuters) -Sterling hit a 10-day low against the dollar on Monday, with investors focusing on monetary policy divergence between Britain and the United States.

In a speech in Brussels, Bank of England (BoE) Governor Andrew Bailey largely stuck to the tone of this month’s interest rate announcement, in which officials softened their language on the need for further rate hikes because of rising uncertainty.

Money markets are pricing in 135 basis points (bps) of rate hikes by year-end, from 145 bps just before Bailey’s speech, including a 55% chance of a 50 bps rate hike in May. [IRPR]

Sterling lost ground against an already strengthening dollar, as 10-year Treasury yields at a three-year high above 2.5% boosted the greenback to its highest in two weeks.

The pound fell 0.6% to its lowest since March 17 at $1.3103, just off its lowest since November 2020 of $1.30 hit on March 15.

Against the euro, the pound fell 0.4% to 83.65 pence.

“EUR/GBP may not weaken much more below the 0.8300 mark,” ING analysts said in a note to clients.

Deutsche Bank (DE:DBKGn) analysts said market focus this week would be on BoE speakers, as investors were assessing how the central bank would balance the need to bring inflation down to its 2% target against avoiding an economic downturn.

Recent policy updates from the BoE have kept downward pressure on sterling. The bank’s last monetary policy meeting signalled more caution over plans for further tightening.

But from now on, the market reaction might not follow the usual path in which the pound strengthens when rates rise.

“This is the second consecutive meeting where the BoE has hiked rates with a tinge of regret and goes to the heart of why we think UK rate hikes may not necessarily be constructive for the pound,” BofA analysts said in a research note.

The BoE raised interest rates on March 17 but softened its language on the need for more increases.

“Simply put, the Bank of England is hiking for the wrong reasons and sounding defensive whilst the Fed is hiking for the right reasons and sounding increasingly hawkish,” they added.

BofA’s proprietary BoE Mood Indicator recently rose to its most hawkish reading on record.