Sterling dipped against the dollar and euro on Tuesday, after growth in Britain's construction industry slowed unexpectedly in July, but losses were limited as investors focus on a Bank of England policy meeting on Thursday. The monthly Markit/CIPS UK construction purchasing managers' index (PMI) fell to 57.1 after hitting a four-month high of 58.1 in June, confounding a Reuters poll estimate for a rise to 58.4. It came a day after a similar survey showed the manufacturing sector improving, which helped sterling on Monday.
Sterling fell to $1.5576, down 0.1 percent on the day, having traded around $1.5606 before the data release. Data from the United States showed new orders for factory goods rebounding in June, although it offered little support to the dollar, which was down 0.1 percent on a basket of currencies. The euro inched up to 70.40 pence, up 0.2 percent on the day and slightly firmer than 70.28 before the data was released.
Sterling has been underpinned in recent weeks by mostly robust data out of Britain, with consumer demand holding up well and the pace of growth accelerating in the second quarter. Bank of England Governor Mark Carney has indicated a decision on rates will come around the turn of the year. All eyes are on Thursday when the Bank of England will release its quarterly inflation report, its rate decision and the minutes of the policy meeting where the first split in the nine-member committee is expected. Investors expect at least two members to vote for a rate hike.
"The market is tilted towards a hawkish BOE on Thursday. So if the BoE falls short, we could see sterling drop. There is a good degree of two-way risk going into Thursday," said John Hardy, FX strategist, at Saxo Bank. Markets have ramped up expectations of a rise in British rates several times in the past three years only to be disappointed. Money markets are pricing in a decent chance of the BoE moving in December or the turn of the year.
Citi said in a note that the inflation report could reflect the impact from lower energy prices and a stronger currency on inflation, but this is likely to be offset by a growing perception that domestic wage pressures are building. "Investors are likely to continue buying sterling dips," it said. Traders said they were also keeping an eye for any foreign demand for Royal Bank of Scotland shares that could support sterling. Britain has sold a 2.1 billion pound ($3.3 billion) stake in RBS to kick off the disposal of its holding seven years after bailing out the bank.
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