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Sterling looks secure as Bank of England nears edge of ‘Table Mountain’

2024 01 29T113414Z 1 LYNXMPEK0S0BL RTROPTP 4 BRITAIN MARKETS STERLING - Global Banking | Finance

Sterling looks secure as Bank of England nears edge of ‘Table Mountain’

By Alun John

LONDON (Reuters) – The Bank of England is likely to hint this week it is aware that the time start cutting rates is nearing, but that is unlikely to bring sterling – this year’s second-best performing major currency – down with it.

The consensus in markets is that one or two of the monetary policy committee’s hawks will stop voting for rate hikes at their meeting on Thursday, but Barclays analysts say this is “unlikely to derail sterling”.

They point to last week’s business activity data which showed Britain’s economy started 2024 on a stronger footing, notable in comparison with equivalent euro zone data that showed businesses there faced a tougher start to the year.

“We expect such demand-side outperformance to continue supporting the pound, particularly versus the euro and Swiss franc,” said Barclays, who expect the BoE to remove some its post-meeting statement’s hawkish language.

Changes in expectations of central banks policy rates are a major driver of currency markets at present.

Markets are currently showing around a 50% chance the first BoE rate cut will come in May, and think it is much more likely the Federal Reserve and European Central Bank will be cutting by then.

The BoE has held its key Bank Rate at 5.25% since August — like the flat top of South Africa’s Table Mountain after a speedy rise, in BoE chief economist Huw Pill’s oft-used metaphor.

This policy has helped support sterling as some central banks have started discussing interest rate cuts, but the BoE has not, with the exception of something of a one-off remark from Pill himself last year.

In fact, three of the nine members of the BoE’s Monetary Policy Committee voted for a further hike in rates at their last meeting, and their statement showed a bias towards further tightening.

The pound is trading around its strongest against the euro in five months, and is up year-to-date on all G10 currencies except the resurgent U.S. dollar.

“The balance that the BoE will have to strike is ‘how can we become a bit more dovish without being dovish’,” Jane Foley head of FX strategy at Rabobank, said.

“It is quite possible we won’t have three votes for a hike, but they will really have to push the rhetoric that ‘we will be on hold for some time’.”

The latest data from the U.S. markets regulator – for the trading days Jan. 17-23 – showed speculators increased their net long sterling position to $2.49 billion, the biggest in four months.

BNP Paribas BoE watchers expect two rate setters to stop voting for increases at the meeting, but they do not foresee a strong reaction in the pound.

They say the recent activity data suggests a chance sterling gains, “but we would be cautious about chasing the currency higher, given the build-up of long positioning”.

Extreme long positioning in an asset is often seen as a negative, as it suggests there are comparatively few investors left to buy and plenty who could decide to sell.

(Reporting by Alun John; Editing by Amanda Cooper and Alison Williams)

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