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Sterling dipped below $1.50 for the first time since April on Monday after a policymaker warned about the impact of a strong pound on inflation, but rebounded slightly as the dollar slipped on soft US data. The newest member of the Bank of England's monetary policy committee (MPC), Gertjan Vlieghe, said in a newspaper interview over the weekend that the tightening effect of a strong pound was "huge" and that he wanted to see growth stabilise or pick up before interest rates started to rise.
Although sterling hit a seven-month low of $1.4994 on Monday, on a trade-weighted basis it is close to eight-year highs. That is mostly because the euro, the currency of Britain's biggest trading partner, has been driven sharply lower by a huge stimulus programme from the European Central Bank. It meets on Thursday and is expected to ease policy further, which is likely to drive the single currency down lower still.
On Monday sterling was 0.3 percent up against the euro at 70.26 pence, less than a cent away from an eight-year high of 69.35 pence hit earlier this year. Against the dollar, it was up 0.1 percent by 1550 GMT at $1.5046, after the Chicago purchasing managers' index (PMI) fell sharply to 48.7, down from 56.2 in October and below even the lowest forecast in a Reuters poll of economists.
"The reason (sterling has) rebounded is the somewhat softer data from the US this afternoon and also the fact that for many market participants $1.50 is a psychological level. It has tried to break it quite a few times in the last few months but it hasn't really managed," said Barclays currency strategist Nikolaos Sgouropoulos. "We think we will break below $1.50 by year-end and stay there for some time."
Investors are currently betting that the BoE will not start to raise rates until late 2016. In contrast, they expect the US Federal Reserve to lift rates from their record lows later this month. "The Bank of England have placed greater emphasis on the impact of a stronger pound as a dampener on the inflation outlook (than the Fed) and that's allowing them to be more gradual in terms of tightening policy," said Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman.
The BoE has signalled it may move as soon as Tuesday to introduce new, higher capital requirements for banks after a two-year recovery in Britain's economy, but the changes are unlikely to have a big, immediate impact on lending. "Beware any measures from the FPC (Financial Policy Committee) to cool credit growth using 'macro prudential' measures," wrote Societe Generale macro strategist Kit Juckes. "Anything that reduces the need for MPC rate hikes reinforces a bearish sterling bias."

Copyright Reuters, 2015

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