Sterling slips to April low after BoE warns of over-reaction to inflation

LONDON: Sterling fell on Thursday after Bank of England Governor Andrew Bailey warned against over-reaction to rising inflation in Britain.

The pound slipped in morning trading to $1.3765 versus the dollar, its lowest level since April, and was down 0.2% at $1.3802 at 1140 (GMT).

Against the euro, it fell 0.3% to 86.02 pence after falling to its lowest of 86.15 in 16 days.

Bailey said in his annual Mansion House speech that it was important to ensure that the recovery was not undermined by a premature tightening in monetary conditions, as a rise in inflation was likely to be temporary.

"The lack of validation for higher rates any time soon has weighed upon sterling," said Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets, adding that it will be interesting to see if that remains the case in August when official inflation forecasts "will be substantially revised up".

Sterling was one of the worst-performing G-10 currencies last week after the BoE kept the size of its stimulus programme unchanged and said inflation would surpass 3%, but that the climb further above its 2% target would be only temporary.

But analysts said cable was faring relatively well versus a strengthening dollar, after the US Federal Reserve signalled last month it would raise interest rates and end emergency bond-buying sooner than expected.

The market also seemed reluctant to price in a risk premium related to the fast spread of the coronavirus Delta variant in the UK, analysts at ING said in a note to clients.

Daily confirmed cases have been rising for weeks in Britain but a rapid vaccination programme appears to have weakened the link between infections and deaths.

Versus the euro, the pound gained almost 5% in the first half of the year, finding some support this week on the European Union decision to extend by three months an exemption on customs checks on chilled meat shipments to Northern Ireland.

Currency analysts said that the post-Brexit dispute has had little impact on sterling so far, but that might change as political divergences between Britain and the EU are "still quite evident," ING said.