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Sterling struggles ahead of inflation data
January 12, 2015 / 10:58 AM / 3 years ago

Sterling struggles ahead of inflation data

LONDON (Reuters) - Sterling fell towards an 18-month low against the dollar on Monday, a day before data that is expected to show inflation dropping sharply, keeping pressure off the Bank of England to raise interest rates any time soon.

A generic picture of a some British sterling money in coins and bank notes. REUTERS/Catherine Benson

Traders also cited a $5.2 billion (3 billion pounds) takeover by London-listed drugmaker Shire Plc of U.S. group NPS Pharmaceuticals as a negative factor for sterling. The British currency will need to be sold to buy the dollars needed for completion of the transaction.

Britain’s consumer price index (CPI) is thought to have eased to 0.7 percent in December, hit by an almost 20 percent monthly fall in the price of oil. A drop below 1 percent would require BoE Governor Mark Carney to write an explanatory letter to Chancellor George Osborne.

A fall in inflation would also bolster bets that the BoE will wait until the second quarter of 2016 before it raises interest rates. That is a view that has changed dramatically in the past six months: last summer, many had expected a rate hike by the end of 2014.

That push-back in rate hike expectations helped drive sterling to an 18-month low of $1.5034 last week.

The pound stayed close to that low on Monday at $1.5119, down 0.3 percent. Against the euro, sterling was flat at 78.07 pence.

“The obvious is going to happen tomorrow in terms of inflation below 1 percent,” said Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ.

“But that is all already priced in. There’s been a very substantial shift in expectations of what the BoE is going to do this year.”

Sterling has already fallen almost three percent against the dollar this month - more than it has in any month since February 2013 as a raft of weaker-than-expected economic data has pushed back even further expectations on the timing of a BoE rate hike.

“The market doesn’t like that the UK ‘eventual hike’ story has virtually disappeared over the horizon,” wrote John Hardy, Saxo Bank’s head of FX strategy, in a research note. “(A) broader GBP rally may require positive UK economic data points.”

Editing by Gareth Jones

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