Sterling weakens

Sterling fell from near two-year highs against the euro on Wednesday and struck a three-week low versus the dollar after minutes from this month's Bank of England policy meeting were less hawkish than some in the market had anticipated. The minutes showed that BoE officials discussed whether there was a case for an early interest rate rise, but there were concerns about hurting the recovery. The nine members of the Monetary Policy Committee voted unanimously to keep interest rates on hold, as forecast by economists in a Reuters poll.
BoE Governor Mark Carney said in a speech in Glasgow that subdued wages suggested more slack in the labour market than previously though, although he added that spare capacity in the economy was being used up quickly. All of which did little to alter expectations for rate hikes later this year.
Sterling bulls cut positions and the pound fell to a three-week low of $1.7024 after Carney's speech and the minutes, down 0.2 percent on the day. The pound has of late struggled to rise towards recent six-year highs as investors await more evidence of a broad-based recovery that would bring forward rate hike expectations. The euro reversed earlier losses to turn higher on the day against the pound. It stood at 79.10 pence, recovering from a 23-month low of 78.74 pence.
"(The minutes) left markets a little disappointed and the pound has fallen," said Alex Edwards, head of the corporate desk at UKForex. "But we don't believe it's so disappointing as to force sterling below $1.70. It hasn't changed the views of the hawks who have a rate hike priced in for later this year." Sterling has risen more than 10 percent on a trade-weighted basket of currencies mainly on expectations that the BoE will be the first major central bank in the West to tighten monetary policy. Investors are pricing in the chance of the first move before the end of this year.
Earlier in the day, the pound marched to a 23-month high versus the euro as hedge funds and speculators sold the single currency. They were betting that euro zone monetary policy would stay loose and on a growing view that possible tougher new sanctions on Russia would hurt fragile growth in the euro zone. Europe's largest economy Germany has strong trade links with Russia. In contrast to expectations of a rate hike in the UK, the euro zone's interest rates were slashed in June and the European Central Bank has left open the possibility of further monetary loosening - possibly through quantitative easing.
"On our view, the market may have got a little ahead of itself in pricing in BoE rate hikes," Rabobank said in a note. "However, irrespective of exactly when the BoE first hikes, it is bound to be ahead of the very dovish ECB. We expect euro/sterling to trend lower towards 77 pence." Traders said the focus will now be on UK retail sales on Thursday and the first reading of second-quarter growth data on Friday. Stronger UK data and a weaker German IFO survey on Friday could push euro/sterling lower, Citi said in a note.