Sterling hit a two-month low against the dollar on Monday, extending falls after the effect on monetary policy of last week's bond-buying changes and on caution before Wednesday's Bank of England Inflation Report. The pound was down 0.15 percent at $1.5869, having hit $1.5865, its weakest since September 5.
It has been under selling pressure since the government unexpectedly announced on Friday it would use proceeds from the BoE's bond-buying programme to trim its short-term borrowing, a move BoE Governor Mervyn King said equated to a "moderate loosening" of policy.
"The implicit assumption is that this (Friday's announcement) is an easier monetary policy stance ... it plays along with the assumption that policy will have to remain loose because of the relative fragility of the economy," said Jeremy Stretch, head of currency strategy at CIBC. The pound has chart support at the 200-day moving average at $1.5850. It has not been below its 200-day average since late August.
Markets will scrutinise the BoE's quarterly report on Wednesday, where the bank releases its latest growth and inflation projections, for indications on the outlook for the economy and the prospects of more easing in the future. A string of UK data this week, including inflation figures on Tuesday, jobs figures on Wednesday and retail sales on Thursday, should give an indication of how the UK has begun the fourth quarter after solid growth in the third.
Concerns surrounding the looming US fiscal cliff of tax hikes and spending cuts due to come into effect in January could also see safe-haven flows into the dollar and weigh on the pound, analysts said. The euro rose 0.2 percent against sterling to 80.11 pence, although gains were limited due to uncertainty about Greece's ability to repay its debt. "Today's (currency) move should be a follow-through of Friday's BoE measure," said Adam Cole, global head of FX strategy at RBC Capital Markets, adding sterling was likely come under pressure.
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