Sterling Little Changed Near 21-month Low Ahead of BoE, Fed

LONDON (Reuters) -The British pound was little changed on Wednesday, near its lowest level in 21 months, ahead of central bank meetings at the U.S. Federal Reserve and Bank of England (BoE).

The BoE policy announcement on Thursday will be the key event for sterling this week, with policymakers expected to raise interest rates for the fourth consecutive meeting, the first such run since 1997.

The pound has weakened in recent weeks on expectations that the BoE may have to slow the pace of tightening as the central bank battles with above-target inflation and a cost-of-living crisis that is showing signs of weighing on economic activity.

Shop prices in Britain surged last month at the fastest rate in more than a decade, according to a survey published on Wednesday that spelt further bad news for many households caught in the worsening crisis.

The Fed meanwhile is expected to hike rates by 50 basis points on Wednesday, the first half-percentage point hike in over two decades.

“The worst scenario would be a hawkish FOMC meeting, with still-cautious BoE policy guidance,” writes OANDA senior market analyst Jeffrey Halley.

“That likely sees GBP/USD testing 1.2200.”

At 1438 GMT, sterling was broadly flat against the U.S. dollar at $1.2487, after hitting its lowest level since July 2020 at $1.2412 last week.

Against the euro, the pound was lower by 0.2% at 84.37 pence.

Sterling traders will also be closely watching local elections on Thursday, with Prime Minister Boris Johnson’s Conservative party projected to lose over a third of its local seats, adding to pressure on Johnson to vacate Downing Street.

“Political uncertainty following tomorrow’s local elections (results due through Friday) could further see the GBP weaken in the near-term,” Scotiabank analysts said.

(Reporting by Samuel Indyk; Editing by Hugh Lawson)