Sterling fell against the dollar on Monday, with investors buying the greenback after a robust jobs report made the first rate hike by the Federal Reserve in almost a decade a near certainty. Investors were also cautious about the pound before the Bank of England's monetary policy committee meeting on Thursday, when policymakers are widely expected to vote to keep rates unchanged at record lows.
Sterling has been under pressure after a dovish Inflation Report in November flagged risks to growth from external developments. Many saw that as the BoE's attempt to rein in the currency which was eying 7-year highs on a trade-weighted basis. Sterling was down 0.4 percent at $1.5060, while the euro was 0.3 percent lower at 71.80 pence. The euro had surged to a five-week low against the euro on Friday after the European Central Bank eased policy significantly less than many in the market had expected.
The dollar index was up 0.45 at 98.794 with investors pricing in about a 80 percent of a Fed hike later this month. The index bounced 0.75 percent on Friday, after non-farm payrolls rose by a slightly higher-than-expected 211,000 last month. Data for September and October were also revised to show 35,000 more jobs than previously reported. "We'll have to take what the market give us, so we'll watch whether the bullish reversal in sterling/dollar leads to anything," said John Hardy, chief currency strategist at Saxo Bank. "We prefer to wait for bearish developments to put the view back lower, starting with a decline back below $1.5000."
The BoE is expected to be the second major central bank after the US Federal Reserve to raise rates since the financial crisis. But investors are cautious about the timing and are currently betting that a hike will not happen until late 2016, given inflation has been rather subdued. There is also element of uncertainty to growth and investments given the risks posed by a vote on Britain's membership of the European Union and which could take place some time next year or in 2017. More and more investors are hedging their bets through the currency derivative route, in case Britain decides to leave the EU.
"The possibility that the UK leaves the EU is a concrete risk that will increasingly capture market attention in 2016," said Olivier Korber, an options strategist at Societe Generale. "Sterling/dollar would fall more than the euro would rise against the pound in a Brexit scenario, but a hedging solution via options is more optimal in sterling against the euro."
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