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Trading

Sterling softens versus dollar against a quiet UK backdrop

Sterling softens versus dollar against a quiet UK backdrop 1

LONDON – Sterling softened against the dollar on Wednesday after three days of gains, ahead of major U.S. inflation data on Thursday and the UK government’s next fiscal statement due next week.

At 1124 GMT, the pound was down 0.71% against the dollar at $1.14650, having rallied 3.5% in the last three trading sessions.

A stronger U.S. currency was in part behind the downward move, as the dollar index rose 0.3% after U.S. midterm election results.

The pound was 0.54% lower versus the euro at 87.770 pence.

Some analysts suggested sterling’s weakness on Wednesday had been triggered by a failure to breach the $1.16 level the day before.

Two sources pointed to weakness in the pound against the euro as a driver of the broader decline in the UK currency, with one source citing a sizeable flow order by a particularly active name in euro/sterling on Wednesday.

The market is looking ahead to British finance minister Jeremy Hunt’s planned fiscal statement on Nov. 17, with indications there will be a squeeze on public spending and potentially higher taxes.

“Everyone is waiting for November 17th to see how tight fiscal policy will be,” ING strategist Chris Turner said, adding that the Bank of England’s rate cycle looks more prone to being repriced lower than those of the European Central Bank and the Federal Reserve.

“So a combination of tight fiscal policy on November 17th and a reassessment of the BoE cycle could be the catalyst for taking sterling lower, until then it will probably be left up to the dollar and the external environment to define sterling moves.”

The BoE’s decision to hike interest rates last week sent the pound 2% lower. The currency has recouped losses since then but is still down 15% against the dollar this year.

The rate hike was accompanied by stark messaging that Britain is facing its longest recession in at least a century, but the central bank also said that borrowing costs may not rise as sharply as the market expects.

Quarterly GDP growth figures on Friday will also provide an important signal for the state of the UK economy.

(Reporting by Lucy Raitano; Editing by Kirsten Donovan)

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