Pound inches up as investors hold out for BoE rate rise

LONDON (Reuters) - Sterling inched up in a quiet day of trading on Thursday, a run of weaker British economic data failing to deter investors from bets that the Bank of England will hike interest rates in the coming months.

Sample polymer five and ten GB pound banknotes are seen on display at the Bank of England in London September 10, 2013. REUTERS/Chris Ratcliffe/pool

Surveys of purchasing managers pointing to a cooling economy have put some pressure on the pound this week, but it is still less than a cent away from nine-month highs reached against the dollar in May.

That resilience, say analysts, is largely due to expectations of monetary tightening from the BoE, with some investors betting on a rate hike as soon as next month after a number of policymakers have spoken out in favour of one.

By late afternoon trade in London, sterling was up 0.3 percent at $1.2967.

But it lost ground to a strengthening euro following a round of weaker-than-expected U.S. labour market data that pulled the dollar lower. Sterling last traded 0.2 percent down at 87.98 pence per euro.

Analysts from Morgan Stanley wrote in a note to clients that despite data pointing to weakness following June’s parliamentary elections they were “loving” sterling, and noted that “soft” indicators such as purchasing managers’ index (PMI) surveys had also dipped immediately after last year’s Brexit vote, before recovering.

“Our sterling optimism finds its foundation in what we call ‘Brexit economics’ and the BoE reconsidering pound weakness and its impact on the economy,” they wrote.

“Sterling weakness has undermined living standards, and with inflation above the BoE’s 2 percent target and its own staff projections, stabilisation should now be on the BoE’s agenda. Talking up rate expectations is a sufficient tool to reach this target.”

But some investors remain unconvinced the BoE will move on rates soon, citing underlying risks to the UK economy as it negotiates an exit from the European Union, and the change in the Bank’s rate-setting committee.

Kristin Forbes, once the BoE’s strongest advocate for a hike in rates, has left the central bank. She is replaced by trade-focused economist Silvana Tenreyro, considered a dove by some analysts.

“I don’t buy in to the new-found hawkish position of the Bank of England. Firstly, I think the risks are too great for anymore of the remaining MPC (Monetary Policy Committee) members to join them,” said Bank of New York Mellon currency strategist Neil Mellor.

“The mix of hawks is going to change anyway, because one of the MPC members who voted for a hike is now gone, replaced - I think - by a dove...I think there will be a surprise in the next MPC BoE meeting.”

Editing by Richard Balmforth