Sterling edged away from a three-week high against the dollar on Monday, with investors unwilling to make major bets ahead of a week packed with UK economic data and the most closely watched US Federal Reserve meeting in years. Whatever the Fed decides on Thursday - the first meeting in recent memory where an interest rate rise has been a live issue - will also have implications for whether the Bank of England raises rates next year.
The Bank of England's chief economist, Andy Haldane, gave markets nothing new to go on after a policy readout last week that sent sterling sharply higher. Opinions were balanced on how the pound will react to inflation and labour data due on Tuesday and Wednesday, respectively. "There's quite a lot of UK data coming out this week, but it is still all about the Fed," said Alvin Tan, a strategist with Societe Generale in London. "The dollar is going to be moved by that, and that should be the dominant factor for cable."
He said sterling should still be supported against the euro by expectations the BoE will raise rates before the European Central Bank. British inflation, expected to come in at zero on Tuesday, is the central argument against a move higher in UK rates, on which markets have blown hot and cold for the past two years. Countering that, jobs and wages numbers have been more positive. "It may be a pretty pivotal week," said Sam Lynton-Brown, a strategist with BNP Paribas in London.
"To the extent that interest rate markets have delayed pricing for an interest rate rise until 2016, the pound has quite a lot of room to move up if the numbers surprise." BNP's economists are calling for an upside surprise on both inflation and the scale of the fall in jobless numbers and see the pound heading back towards 70 pence per euro if that happens. The pound fell by just over 0.1 percent to $1.5417, having dipped as low as $1.5373. It was marginally higher on the day at 73.32 pence per euro.
The election of Jeremy Corbyn to lead the main opposition Labour Party, as expected, had no discernible effect. Traders and strategists have argued in recent weeks that his leadership is likely to increase the risk of Britain leaving the European Union in a referendum by the end of 2017, potentially weighing on the pound. Barclays argued that the heart of the BoE's dilemma on interest rates now is the relative strength of the pound, which last month reached its strongest level since 2008 against a basket of major currencies. "We continue to think the BoE remains uncomfortable with persistent pound strength and remain bearish on sterling," Barclays' analysts said in a morning note. "If the exchange rate does not continue to adjust lower, the market may price even further delays to BoE tightening."
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