Sterling steadies

Sterling steadied just above $1.32 on Thursday, having pulled away from a one-year high the previous day, as traders waited for clues from the Bank of England on whether it might soon lift interest rates from record lows. The BoE will publish its latest policy decision at 1100 GMT, along with the number of members of its rate-setting Monetary Policy Committee who voted in favour of an immediate rate hike. UK rates have not risen for a decade.
All eyes will be on the Bank's chief economist, Andy Haldane, to see if he switches sides and joins the two of the MPC's nine members who have been calling for a reversal of last year's quarter-point cut in rates. If he moves now, markets are likely to price in a strong chance of a rate hike as early as the BoE's next meeting, in November, potentially unsettling an economy that has shown signs of faltering this year.
"Today's BoE decision has a little more attention than a typical non-inflation report meeting, since the BoE remains concerned that the market is too complacent on its pricing of the UK policy curve," said ING currency strategist Chris Turner. "For today, it all seems to boil down to whether Chief Economist Haldane backs up his hawkish rhetoric in July with a vote to hike."
Sterling posted its weakest day in six weeks against the dollar on Wednesday, after earlier in the day hitting a one-year high of $1.3329. The pound had climbed sharply on Tuesday after stronger-than-expected data on inflation, which at 2.9 percent - far above the BoE's 2 percent target - drove expectations that the Bank might have to move towards raising rates.
But it skidded on Wednesday after weaker-than-forecast numbers showing that wage growth was still lagging. On Thursday it was flat on the day at $1.3209. The BoE faces the dilemma of having to balance weak wage growth, slower economic activity this year and big questions about what Brexit will mean for the economy with above-target inflation.
Many economists think uncertainty over how Brexit will pan out means most policymakers will stick with their view that the current surge in inflation is temporary. "We expect the majority of the committee to remain in favour of steady rates until August 2018 at the earliest, though we expect most MPC meetings between now and then to contain hawkish undertones," wrote Rabobank strategists in a note to clients.
"With markets still mostly disregarding early rate hikes, stronger hawkish rhetoric than expected could underpin sterling rates, and the currency." Against the euro, sterling was flat at 90.05 pence, close to a six-week high of 89.83 hit the previous day.