Sterling fell to a three-week low Friday, on track for its biggest weekly loss against the dollar since late May, as expectations of an interest rate hike by the Bank of England were pushed back to the first quarter of 2016. The dollar was also buoyed by US jobs data, which more or less came in line with expectations, and kept alive the chances of a an interest rate rise by the Federal Reserve in September. The dollar index hit its highest in nearly four months at 98.334 after the data.
"Long sterling positions are being unwound after Thursday disappointed many bulls," said a London-based spot trader. Minutes on Thursday showed just one policymaker voted for higher interest rates at the BoE's August meeting, when the bank also warned the strong currency and weak energy prices would keep inflation subdued well into next year.
Many in the market had speculated that at least two members of the bank's policy committee would vote for a hike. Economists at UBS, who had been calling for a hike in November, have shifted their call to February, with markets also starting to price in the chance of the first rate hike around that time.
Sterling fell 0.4 percent to $1.5439, it lowest since July 10 while the euro was flat at 70.35 pence and showed little reaction to data that showed Britain's trade deficit widening. On a trade-weighted basis, sterling was at 93.9, having hit a 7-1/2-year high earlier this week. It is up 20 percent against its currency basket since March 2013, and BOE Governor Mark Carney cited those gains as a reason why inflation remains subdued in Britain.
"The message that the time of the first rate increase was getting closer was clear once again but the actual timing of the move was certainly no clearer," said Derek Halpenny, European head of global market research at Bank of Tokyo Mitsubishi. "It would appear that the drop in commodity prices along with a 3.5 percent appreciation of the pound since the last inflation report were enough to allow the BOE to remain very cautious on the timing of the first move."
Despite subdued inflation, sterling has been underpinned in recent weeks by robust economic data, with British consumer demand holding up, wages rising and the pace of growth accelerating in the second quarter. Carney had earlier indicated a decision on rates would come around the turn of the year. Markets have ramped up expectations of a rise in rates several times in the past three years, only to be disappointed. Nevertheless, with the US Federal Reserve inching towards a hike in September, investors appear more confident this time that the BoE could follow suit. "With September looming as the first possible opportunity for a rate hike, today's jobs report clearly puts the US on the path to an imminent decision, be it next month or October," said Alex Lydall, senior sales trader at Foenix Partner.
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