Sterling falls as BoE policymaker says inflation pressures lower

Sterling falls as BoE policymaker says inflation pressures lower
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Sterling falls as BoE policymaker says inflation pressures lower
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Updated 16 February 2016

Sterling falls as BoE policymaker says inflation pressures lower

Sterling falls as BoE policymaker says inflation pressures lower

LONDON: Sterling fell around half a percent against the dollar on Monday after Bank of England policymaker Ian McCafferty said inflationary pressures had fallen, although he still expected the next interest rate move to be up.

Speaking to the Wall Street Journal, McCafferty, who dropped his lone call to hike interest rates earlier this month, said the central bank was not “out of ammunition” if it needed to fight a renewed downturn by cutting interest rates or restarting its bond-buying program.
Sterling fell from around $1.4480 before the article was published to a two-day low of $1.4426. It later recovered to $1.4450, but that still left it down one third of a percent on the day.
“McCafferty’s comments showed his shift in thinking but there wasn’t anything hugely surprising in what he said,” said Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman.
He said the more important driver for sterling this week would be a two-day summit at which Prime Minister David Cameron will try to clinch a deal to keep Britain in the European Union.
The cost of hedging against swings in sterling’s value over the next week has jumped to its highest since Britain’s general election last May, as investors brace for volatility stemming from the summit.
“If there was a Brexit scenario, the market is considering the probability that could provide another headwind to growth in the UK and could result in lower rates from the Bank of England later this year,” Hardman said.
Some banks predict falls of up to 20 percent in sterling’s value if Britons vote to leave the EU, although polls suggest that the most likely scenario — just — is that Britain remains in the European Union.
“Although there are other issues also on the agenda, the focus will be on progress on UK renegotiation at this week’s EU leaders’ summit,” said RBC Capital’s head of G10 FX strategy, Adam Colem, adding that any signs of agreement will be positive for the pound.
Against the euro, sterling bounced back from a 14-month low, helped by better appetite for riskier currencies and assets. It traded up half a percent at 77.195 pence per euro, having traded as weakly as 78.975 pence per euro on Thursday.
The single currency tends to move in sync with safe-haven assets due to its low yield and often underperforms when global stocks and commodities rise. Sterling, on the other hand, tends to rise along with risk appetite, on account of its higher interest rate and large current account deficit.
Sterling traders be focused on monthly British inflation data due on Tuesday, which expected to show a rise of 0.3 percent year-on-year.
Wage growth data will be released on Wednesday.