LONDON (Reuters) - Sterling retreated against the dollar and euro on Thursday, with signs the economy is finally slowing after last year’s Brexit vote expected to weigh on the Bank of England’s message on interest rates later in the day.
Wage data on Wednesday were the latest numbers to point to a weakening economy and the potential for growing pressure on household spending as the weaker pound and higher oil prices raise inflation in the months ahead.
Market pricing and the bulk of strategy notes point to expectations the bank will stick to its plan to support growth with loose policy through the Brexit process.
“The February message looked dovish against market pricing and BoE expectations have flattened through February despite moves higher in Europe and the U.S.,” Citi strategist Josh O‘Byrne said in a note recommending an underweight position on the pound.
“Our base case sees neutral guidance maintained and no changes in key views for growth and inflation. We still like sterling shorts against the dollar.”
The pound got some relief from a retreat in the dollar late on Wednesday, but was trading a third of a percent weaker since the U.S. close at $1.2251. It fell 0.2 percent to 87.42 pence per euro.
The politics of Brexit, as the government prepares to lodge its formal notification of the intention to leave the European Union, continue to weigh on the pound.
Scotland’s First Minister gave markets a jolt on Monday by demanding the right to hold a new referendum on independence once the negotiations on the terms of Britain’s departure are concluded next year.
That adds to a growing list of political issues that dealers say are likely to worry investors in sterling as the talks get going over the next year.
At the same time, the victory for Dutch Prime Minister Mark Rutte over far-right rival Geert Wilders suggests that populist challenges to the euro this year may not be as great a danger as markets had feared three months ago.
“Cable (the dollar exchange rate) is definitely pulling back a little bit,” said Alvin Tan, currency strategist at Societe Generale.
“I think it’s largely a reaction to the fact that euro-sterling is moving by and large a little bit higher starting overnight and this morning based on the Dutch election results.”
Editing by Larry King