LONDON (Reuters) - Sterling hit a two-week low against a broadly stronger euro on Tuesday, a tightening of credit controls offering only brief support given competing interpretations of what it means for future interest rates and growth.
The defection of several Monetary Policy Committee officials to the camp supporting a rise in base interest rates has given the pound, battered by another round of political uncertainty after this month’s elections, some support in the past week.
On the one hand, reinstating the minimum 0.5 percent of risk-weighted assets that banks are asked to hold as a buffer against shocks to consumer finances was a sign of confidence in an economy that has looked to be slowing.
But it may also take any unwanted steam out of areas of loan growth that could otherwise be cited as one reason for raising rates, helping policymakers hold off for longer with any hike in the Bank’s main borrowing rates.
“When you’re looking at the buffer, they have increased it, and that is a marginal tightening of monetary conditions, and hence possibly a plus for the pound,” said Oanda analyst Craig Erlam.
“For now, I think, sterling is stuck in a range between $1.26 and $1.28.”
Sterling did gain against the dollar - rising 0.4 percent to $1.2774 - but that appeared to be mainly a by-product of the euro’s full percentage point gain against the greenback due to comments on monetary policy by European Central Bank chief Mario Draghi.
Against the euro, the pound fell 0.6 percent to 88.41 pence, hitting its weakest level in two weeks. EURGBP=
Derek Halpenny, a strategist with MUFG in London, has been one of the bank analysts calling for a rise in sterling in recent months, judging that the worst of the pound’s Brexit-led sell-off is now in the price.
But he also says the uncertainty generated by Prime Minister Theresa May’s loss of her parliamentary majority in elections on June 8 has made it harder for sterling to rise in the near term.
May has sealed the deal she needs to approve a stripped-down legislative programme, but many political commentators still expect another election to be called in the next year under a new Conservative leader.
Halpenny said the progress of the talks on Britain’s departure from the European Union should be crucial to sterling in the coming weeks.
“While macroeconomics might start to have a greater influence, the big events are still Brexit-related,” he said.
“The sooner this first stage of talks is over, and we can get on to what investors really care about - the negotiating of a smooth transition period - the better (for the pound).”
Editing by Ed Osmond