LONDON (Reuters) - Sterling fell on Monday before a monetary policy meeting later this week at which the Bank of England is expected to reaffirm its commitment to low interest rates for a prolonged period.
The central bank, under new governor Mark Carney, is expected to lay out plans for giving “forward guidance” on monetary policy which could weigh on the pound.
A statement accompanying the bank’s decision on Thursday may provide details of this, although a fuller outline will not come until next week’s Quarterly Inflation Report. No changes to interest rates or quantitative easing are expected this week.
The pound fell 0.3 percent to $1.5338 (9995 pence), slipping further from a five-week high of $1.5435 struck on Thursday.
“I would be biased towards a weaker pound. The risks on Thursday are that we see something more dovish than the market is anticipating,” said Steve Barrow, head of G10 currency research at Standard Bank. He added that sterling could drop towards $1.50 and 87 pence per euro in coming weeks.
The pound rose briefly earlier after figures showed lending to small and medium-sized British firms grew at the fastest pace on record in June while a survey showed strong retail sales in July.
But the gains proved short-lived. Analysts said investors were likely to be sceptical that better UK data would prevent more stimulus measures from the Bank of England.
“A more dovish and more unfamiliar Bank of England policy framework is probably what the market is expecting and this should prove damaging for sterling,” said Nawaz Ali, market analyst at Western Union Business Solutions.
In contrast to the Bank of England, the U.S. Federal Reserve, which announces a policy decision on Wednesday, is expected to scale back monetary easing in the coming months. If the Fed confirms this, it would pressure the pound more against the dollar.
Sterling remained weak against the euro, which was up 0.1 percent at 86.35 pence and close to a peak of 86.435 pence reached on Thursday. More gains could see the euro target a four-and-a-half month peak of 87.12 pence, hit in mid-July.
The European Central Bank also meets on Thursday and is expected to reiterate a commitment to low interest rates.
However, Standard Bank’s Barrow said the ECB was unlikely to provide any specific timeframe in its forward guidance, which could allow the euro to move higher against the pound.
Editing by Hugh Lawson