Sterling drops as dollar lifted by Fed chair speculation

Market Reactions to Fed Chair Speculation

LONDON, Jan 30 (Reuters) - The pound dropped against the dollar on Friday, with the U.S. currency benefiting from growing expectations that former Fed Governor Kevin Warsh will be unveiled as new Fed chair later on Friday. 

Impact on Sterling and Dollar

Sterling was last down 0.56% at $1.3742 weakening by a similar amount against the greenback as other majors. Versus the euro, the pound was little changed at 86.70 pence to the common currency. 

Bank of England's Upcoming Meeting

The pound's recent moves have largely been driven by developments elsewhere, though attention is starting to shift to next week's Bank of England meeting. 

Interest Rate Expectations

Markets see the BoE as all but certain to hold interest rates steady but the focus will be on updated economic projections and policymakers' voting split as investors try to predict how much more easing the central bank will do this year. 

Diverse Views on Monetary Policy

"Updated projections are likely to show a more benign inflation outlook, supporting the BoE’s easing bias," said Dani Stoilova, Europe economist at BNP Paribas. She expects the BoE to cut rates again in March, before an extended pause. 

Markets do not see a cut as the more likely decision until April. 

The British central bank publishes individual policymakers' votes and reasoning. There are currently a wide range of views on the rate-setting Monetary Policy Committee, meaning analysts spend some time trying to assess each voter's view. 

"Given the extent of division, the views of individual MPC members have become increasingly important. In fact, it is the slightly less dovish tilt in communications from Dave Ramsden and Sarah Breeden that underpins our expectation for a 7–2 vote split," Stoilova said about next week's meeting. 

"While both support further easing, in our view, they do not necessarily support back-to-back reductions." 

On the day, the focus remained on the new Federal Reserve chair. U.S. President Donald Trump said on Thursday he would name Powell's successor on Friday. Bloomberg News reported Warsh will get the nod, while a person familiar with the matter told Reuters that Warsh had met Trump at the White House on Thursday.

The dollar and long-dated U.S. bond yields rose on the reports. While investors think Warsh will be inclined to cut interest rates, they expect him to rein in the Fed's balance sheet. 

(Reporting by Alun John in London; Editing by Hugh Lawson)