LONDON: Sterling looks likely to slide against the dollar given the shifting outlook for monetary policy in Britain and the US.
The chances are that incoming Bank of England Governor Mark Carney will try to persuade his new colleagues to loosen monetary policy further, even as the US Federal Reserve considers slowing the pace of its asset purchases.
The Bank of England has so far chosen not to add to the 375 billion pounds of government bonds it bought with newly-created money between March 2009 and October 2012.
But that is not the full story.
The central bank has extended its Funding for Lending Scheme, which supports the provision of credit to the UK housing market in an additional attempt to kickstart the economy.
Carney, who takes the helm of the Bank of England on July 1, could also try to make monetary policy more accommodative by offering guidance on how long interest rates will remain low, as the Fed has done.
By contrast, US central bankers have begun to discuss the possibility of reducing the pace of the asset purchases that are one of the centerpieces of its ultra-accommodative monetary policy.
Against this backdrop, the yield premium that US 10-year bonds offer over British ones has risen to 65 basis points from 42 basis points at the start of the month.
Investors who are wondering whether to hold sterling rather than dollars at current levels will need a strong macro-economic argument to trump the growing US yield advantage.
That may be a challenge, especially for central bank reserve managers who are highly attuned to yield differentials, given recent US economic reports have tended to be stronger than British data.
Investors may also be inclined to pare sterling holdings or defer buying pounds until they have a clearer idea of how the currency will be viewed by the BOE under Carney.
Fund manager PIMCO has said Carney might wish to see sterling fall in value against the dollar, perhaps to $ 1.37, as part of a renewed attempt to boost the British economy.
Against this backdrop, investors will wonder how much scope sterling has to extend the gains which have seen it rise about 2 percent since mid-March.
The risk is that pro-active reserve managers and investors may sell sterling near the 55-day moving average, which is currently $ 1.5272, in the expectation that it will slide toward the year’s lows near $ 1.4830.
Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.
