February 7, 2018 / 10:38 AM / 6 months ago

Sterling slips before cbank meeting, rate view key

LONDON (Reuters) - Sterling edged lower on Wednesday, heading back towards a 2-1/2 week low hit in the previous session as a central bank meeting on Thursday kept investors wary of adding positions aggressively amid a broad dollar bounce.

A British Pound Sterling note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

Currency bulls have been hit by a drip feed of weak economic data since the pound scaled a post Brexit referendum vote high above $1.43 in late January.

Surveys this week showed growth in the world’s sixth-biggest economy looked set to slow in the first quarter of 2018 while housing prices fell unexpectedly last month indicating a struggling economy.

“While the British economy has shown some improvement in recent months, structural factors such as a wide current account deficit remain a drag,” said Hans Redeker, global head of currency strategy at Morgan Stanley in London.

While UK’s current account deficit has shrunk from a record seven percent of GDP in the fourth quarter of 2015, at 4.3 percent for the latest quarter ending September 2017, it remains well above a historical median of around one percent, according to Thomson Reuters data.

Sterling eased 0.15 percent lower at $1.3926 but still well above a Tuesday low of $1.3838, its lowest since Jan 19.

Karen Ward, chief markets strategist for UK and Europe at JP Morgan Asset Management, said more important than any rate hike would be the outcome of the Brexit negotiations for a transition arrangement and any signs of further improvement in the economy’s prospects.

“With all this in mind, it doesn’t seem the right time for a bold pre-commitment on a rate rise just yet,” she said.

Futures markets point to barely more than one rate hike until the end of the year with only a 40 percent probability priced in for a quarter point move by May.

Britain is due to leave the EU in March, 2019 but remain in the single market during a transition period, set to run until the end of 2020.

But a document showed on Tuesday that the European Union wants the power to restrict British access to the single market during a transition period after Britain leaves the bloc, as a way to punish London if it violates agreed rules.

Sterling hit a post-Brexit referendum vote high of $1.4346 on Jan. 25 and is down around 3.5 percent since that peak.

The currency has been hurt by the general flight from risk and also weighed down by this week’s surveys confirming the poor shape of Britain’s economy and fresh tensions over its divorce negotiations with the European Union.

British house prices fell unexpectedly last month as inflation continued to squeeze household budgets, dragging annual house price growth down to one of its weakest rates in years, figures from major mortgage lender Halifax showed on Wednesday.

The BOE also releases its inflation report on Thursday.

BOE Governor Mark Carney has said wage growth is finally picking up and that the focus of the BoE is shifting back to tackling above-target inflation. Analysts reckon any further positive forecasts on the economy might prompt investors to add positions in the undervalued currency.

ING analysts predicted more sterling upside in the medium-term, having revised their end-2018 forecast to $1.45.

Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

Reporting by Saikat Chatterjee; Editing by Raissa Kasolowsky, William Maclean

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