Sterling slid nearly 1 percent on Monday, retreating from its highest level since the Brexit vote, after Bank of England Governor Mark Carney said any coming interest rate rises would be limited and gradual. Speaking at the International Monetary Fund in Washington, Carney reiterated the central bank's message last week that record low interest rates could rise in coming months, but added that "any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent".
His comments pulled the pound, already lower on the day, down 0.9 percent to the day's low of $1.3465 before it settled around $1.3480, 0.8 percent lower on the day. Sterling also lost ground to the euro, last down over half a percent at 88.45 pence per euro. "Carney's speech ... is likely a less hawkish view than markets had anticipated," said Caxton FX currency analyst Alexandra Russell-Oliver.
The pound rose as much as 3.3 percent last week, jumping over four cents to $1.3618 on the back of hawkish messages from the BoE and Gertjan Vlieghe, one of the Bank's rate-setters normally considered a dove. "Whenever you get these big monetary policy repricings, you always get a big overshoot in expectations," said ING currency strategist Viraj Patel. The change in the BoE's guidance has prompted two of Britain's "Big Four" banks - HSBC and Barclays - to forecast higher UK interest rates as soon as the BoE's November meeting.
HSBC revised its year-end sterling forecasts by a full 15 cents to $1.35 and said it no longer saw the euro reaching parity with the pound, which it had previously expected to happen by year-end. Brexit headlines were also on investors' radar ahead of a speech in Florence on Friday by British Prime Minister Theresa May. She is likely to address Brexit negotiations that have been postponed to the week of September 25.
May appointed the top official at the Brexit ministry as her EU adviser, taking tighter control of divorce negotiations just as Britain tries to shift the focus of talks onto the future relationship with Europe. Brussels has said talks on Britain's future trading relationship with the EU can only start after the other 27 EU governments are satisfied that "sufficient progress" has been made on the terms of the departure.
"What's interesting is the expectation of a rate hike is having a greater influence (on the pound) than some of the political issues that potentially could have weighed on sterling in a way that they might have done six months ago," said Simon Derrick, head of markets strategy at Bank of New York Mellon. "We're still in the middle of Brexit negotiations, we've got the Conservative party conference coming up and we're in a time of political uncertainty."
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