Sterling fell to a three-week low against the euro on Monday, weighed down by doubts over whether British interest rates will rise any time soon and worries over the outcome of a national election in early May. Bank of England Chief Economist Andy Haldane said last week the bank should be ready to cut interest rates further if inflation looked likely to fall below its 2 percent target. The next policy move was as likely to be a cut in rates as a hike, he said.
Those comments echoed a cautious tone from the BoE's monetary policy committee in minutes from its latest meeting released last Wednesday, where members flagged the impact of a strengthening pound on inflation.
Investors pushed back their expectations of when rates will rise in response. Having priced in a hike in early 2016 at the start of last week, they now do not expect one until the middle of next year.
"If there is going to be any good euro strength, it is going to be against sterling as (the BoE) is more likely to push interest rates higher much later than the US Federal Reserve," said Angus Campbell, senior analyst at FxPro in London.
The euro was 1.2 percent higher against sterling at 73.10 pence. The pound fell 0.1 percent against the dollar to $1.4941.
Campbell said political risks were also being priced in.
"People are pricing in greater uncertainty; you have to apply a greater degree of risk to sterling as the election gets closer. The outlook for sterling as we approach the election is negative and the euro could benefit from that," he said.
He played down the impact of an industry survey that showed British factory orders stagnated unexpectedly in March.
Traders will look closely at Tuesday's consumer price data, expected to show inflation sank to 0.1 percent year-on-year in February. Some economists polled by Reuters reckon it fell into negative territory.
"This week's most important data will be tomorrow's CPI and if that surprises on the downside, look for more talk of rates staying on hold long after the Fed starts hiking and some talk of a possible cut," wrote Societe Generale analysts in a research note.
British government bonds underperformed sharply against German Bunds, which were boosted by caution ahead of a meeting between the leaders of the Greek and German governments.
The yield spread between 10-year gilts and the equivalent German Bund bottomed out at 129 basis points, its lowest level since February 11, before rebounding to 130 basis points and ending down 3 basis points on the day.
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