Sterling held near two-week lows on Thursday after weak economic data and a global drop in government bond yields raised expectations that the Bank of England's next policy move will be to cut interest rates. Investors have ramped up their expectations for monetary easing from the world's central banks this week, and traders believe the BoE, which until recently had signalled its next move would be to tighten, will not be able to resist the pressure to ease.
A speech by BoE Governor Mark Carney this week convinced money markets to price in a rate cut over the next 12 months. Falling Treasury yields in the United States have boosted expectations the US Federal Reserve will cut interest rates this month for the first time in a decade, leaving sterling/dollar in a tight trading range. Weak British economic figures have added to investors' sense that the BoE will lower borrowing costs. Purchasing Managers' Index (PMI) data released this week showed an economy struggling to gain traction.
Sterling recovered slightly from a two-week low reached on Wednesday and was trading flat at $1.2580. Versus the euro, the pound was little changed at 89.73 pence. With US markets shut for a holiday, traders were wary of taking fresh positions before monthly US jobs data on Friday.
Esther Maria Reichelt, an analyst at Commerzbank, said the question of who will replace Theresa May as Britain's prime minister was key to sterling's performance, adding: "I don't see a big driver for sterling until we find out." For euro-sterling, "levels around 90 are totally justified," Reichelt said, given anxiety over what sort of Brexit policy the new leadership will pursue and whether May's exit deal with Europe can be renegotiated.
Conservative Party members are due to receive postal ballots this weekend to vote for either Boris Johnson or Jeremy Hunt to replace May as the governing party's leader. The winner is due to be announced on July 23.
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