Sterling failed to recover ground against the dollar on Tuesday after hitting a five-month low the previous day as traders bet the United States was getting closer to interest rate hikes while Britain might be moving further away. The pound hit $1.6501 - its lowest since March - on Monday after Scotland's pro-independence leader Alex Salmond won a final TV debate before a September 18 referendum that could see the UK lose a region representing some 10 percent of its economy. Opinion polls still suggest Scots will reject independence.
The British currency was flat against the dollar on Tuesday at $1.6582 - more than 6 cents lower than in mid-July, when investors were pricing in the chance of an interest rate rise by the Bank of England before the end of the year. Sterling has suffered since then as investors have unwound those expectations, with the currency falling for seven straight weeks against the dollar, its worst run in six years.
Despite minutes last week from the BoE's latest policy committee meeting showing two of the nine members voting for an immediate rate hike, falling wages and inflation, as well as dovish signals from the central bank, have led many to push back rate rise expectations well into 2015. "There's a possibility that the first rate hike might ... not come until the second half of next year," said Simon Derrick, a currency strategist at Bank of New York Mellon. "I still think there are an enormous amount of headwinds out there (in the UK economy)."
Data published on Tuesday showed net mortgage lending in July was the lowest since January. Tighter rules on mortgage lending introduced late in April have taken some heat out of the housing market, lessening the impetus for the BoE to introduce new policy measures to cool it down. The pound has in general fared better against a struggling euro, which has been hit by a run of dismal economic numbers for the common currency zone. However, the euro managed to inch up 0.1 percent on Tuesday to 79.65 pence per euro. Euro zone inflation data is due on Friday. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July, falling even further below the European Central Bank's target of close-to-but-below 2 percent.
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