Sterling rose on Monday, in a week set to be dominated by a Bank of England inflation report that could give investors fresh cues on when monetary policy will be tightened in the United Kingdom. The report on Wednesday, allied to employment and wage data, should provide another signal of the bank's intentions on interest rates, the key driver for the pound's 15 percent rally against the dollar in the year to the start of July.
The weakness in the past month has come chiefly on the back of a resurgence in the US currency, but there are also doubts creeping back into the market over the timing of the BoE's first rise in interest rates and the scale of hikes to follow. Some analysts said Wednesday's wage numbers might prove more influential than the inflation report.
"We expect the headline measure to show a drop in average earnings of 0.1 percent in the three months to June compared to last year," said Michael Turner, a strategist with RBC Capital Markets. "This base effect-led distortion will unwind next month, but even then earnings are expected to fall short of the 2.5 percent rate the (Bank of England's) MPC expected in May - any further surprise weakness this time will make the MPC nervous."
Sterling gained 0.1 percent against the dollar to stand at $1.6792, having hit a two-month low of $1.6767 late on Friday. The euro fell 0.3 percent against the pound to 79.71 pence. Most analysts are calling either for a rise in interest rates in November, when the BoE publishes its next update on the outlook for inflation and growth, or in February.
"We may have to wait until September for a more sustained impetus on sterling, especially if we see some members of the MPC voting for higher rates by then," said Simon Smith, chief economist at FxPro. Some have begun to ask again in the last couple of weeks is whether there is enough doubt over the pace of wages, inflation and the overall solidity of Britain's economic recovery to push the timetable further out.
That has knocked sterling back almost 2.5 percent in the past month against the dollar and 1.3 percent against a trade-weighted basket of currencies. But that retreat may have created more room for another push higher, particularly against a broadly weaker euro. "Following recent retracement in UK interest rate expectations, hawkishness could have a bigger impact on the pound," Citi said in a note. "We favour short euros against sterling in the run-up to the report."
In the gilts market, long-dated British government bond prices retreated after hitting a year's high on Friday, underperforming against German Bunds and US Treasuries as European stock markets rallied. The 30-year gilt yield was up around 3 basis points at 3.15 percent, on track for its biggest daily gain since June 6 when global government bond yields soared after strong US labour data. The 10-year British gilt was last up around 2 basis points at 2.48 percent.
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