Sterling advances against dollar, euro ahead of BoE policy announcement

By Samuel Indyk

LONDON (Reuters) -The British pound climbed against the dollar on Monday, adding to gains from Friday as the U.S. currency dropped following a weak U.S. jobs report, with the focus on the Bank of England's impending policy announcement later this week.

The pound was last at $1.3306 against the dollar, up 0.2% after a 0.6% gain on Friday.

But the currency slid 3.8% last month, its biggest monthly drop since September 2022, on concerns over Britain's fiscal position and softening economic data.

"Narratives are often hard to shake and the mood music around GBP has been glum for some time," said Kamal Sharma, senior FX strategist at Bank of America.

The pound was last up 0.3% at 87 pence per euro. It fell to 87.69 pence last week, its weakest against the single currency since May 2023.

Sharma believes the pound will strengthen into year-end against the euro as he expects euro area data to soften, prompting more rate cuts from the European Central Bank.

Danske Bank FX strategist Mohamad Al-Saraf held a more bearish view on the pound, expecting the currency to fall to 89 pence per euro in 12 months.

"We think the British economy has shown more pronounced signs of weakness, particularly the labour market," Al-Saraf said.

"The relative growth outlook between the UK and the euro area are becoming pound negative."

Attention was turning to the BoE policy announcement on Thursday, with markets pricing in around a 90% chance of a quarter-point rate cut. Traders are pricing in 50 basis points of easing by year-end.

With a rate cut almost fully priced, focus for currency traders will be on the outlook for interest rates and whether the central bank could slow the pace at which it shrinks its holdings of government bonds, known as quantitative tightening.

"There could be a positive surprise for sterling were the BoE to announce that a lower pace of quantitative tightening ... was accompanied by fewer sales of longer-dated Gilts," said ING head of research Chris Turner.

(Reporting by Samuel Indyk; Editing by Bernadette Baum)