Sterling falls after incoming Bank of England rate-setter's comments

LONDON (Reuters) - The pound fell versus the dollar on Tuesday after an incoming Bank of England policymaker expressed caution over Britain’s readiness for higher interest rates and uncertainty over the impact of Brexit on the economy.

FILE PHOTO: British Pound Sterling banknotes are seen in a box at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017.REUTERS/Leonhard Foeger

Sterling fell as much as half a percent as economics professor John Haskel, whose views are relatively unknown and who replaces a policymaker who has called for higher interest rates, spoke to the British parliament’s Treasury Select Committee.

“For me, the ‘depending on Brexit negotiations there may be at least a temporary lull in the economy’ speaks volumes,” said Neil Jones, head of FX hedge fund sales at Mizuho, referring to Haskel’s comments.

Jones said the comments suggested Haskel was more likely to vote to hold interest rates than to raise them, possibly shifting the BoE voting pattern back in favour of the doves.

Sterling had enjoyed a bounce off 7-month lows after a Bank of England meeting last week raised expectations of a rate rise in the coming months. But the rally has proved short-lived.

The pound fell to $1.3208, still above the 7-month low of $1.3102 plumbed last week, before settling at $1.3244, down 0.3 percent on the day.

Sterling also fell to a nine-day low versus the euro of 88.120 pence as Haskel spoke before rising to trade flat.

The pound had been one of the best-performing currencies in 2018, but weak economic data and a surge in the dollar have erased all of its gains for this year. It is headed for its weakest quarter since that of the Brexit referendum in 2016.

The British currency had already been under pressure on Tuesday as concerns about a growing trade conflict between the United States and other major economies limited investors’ appetite for risk.

Sterling traders were also refraining from taking out big positions before a European Union leaders’ summit later this week.

The summit means the focus for much of the trading sessions this week will be on Britain’s efforts to agree a deal with the EU on the shape of the trading relationship after their divorce.

“If the spreading weakness of global equity markets reflects a dawning realisation that the economic cost of a trade dispute is significant, then it should be no surprise that concern is growing about the impact of leaving the single market,” said Kit Juckes, a currencies strategist at Societe Generale.

Juckes said he found it difficult to be cheerful about the outlook for sterling. Rate differentials between Britain and the United States suggested a lower pound and the currency has also failed to capitalise on euro weakness caused by a more dovish European Central Bank.

GDP data for the first quarter on Friday will also give some indication on how Britain’s economy is faring.

Markets see more than a 50 percent likelihood of the BoE raising interest rates in August by 25 basis points and around a 90 percent chance of a rate increase by the end of 2018.

Reporting by Tommy Wilkes and Tom Finn; Editing by Jon Boyle and David Stamp