Sterling slipped from the day's highs on Thursday after the Bank of England kept interest rates on hold and warned about the risks of a no-deal Brexit, with the British currency initially trading higher thanks to better-than-expected retail sales and a weaker dollar.
The BoE said Brexit uncertainty had "intensified considerably" over the last month and that falling oil prices were likely to push inflation below its 2 percent target soon. As expected, its nine rate-setters vote unanimously to keep rates at 0.75 percent. The minutes from the central bank's meeting this week showed growing unease about chaos surrounding Britain's divorce from the European Union, which is due in March.
Adding to anxiety, the British government removed the word "unlikely" from its official guidance on how to prepare for a no-deal Brexit after the cabinet ramped up preparations for leaving the EU without a deal. Sterling edged down after the BoE decision and at 1640 GMT was up 0.2 percent at $1.2643.
The pound had earlier risen to as high as $1.2707, helped by strong retail sales growth and a dollar that weakened across-the-board on growing concerns that US policymakers may be raising rates just as the world's biggest economy faces a slowdown. Against the euro, the pound was 0.1 percent lower at 90.32 pence.
Economists said that with Britain still to settle how it will leave the European Union in March, the BoE has been forced to keep its monetary policy stance on hold and contingent on the divorce from the EU. "The inflation pressures are not so significant that you [the BoE] need to prepare markets for an interest rate hike, even if that is your intention to do so," said Kallum Pickering, UK economist at Berenberg. If the BoE's aim had been to avoid moving markets that is exactly what it had achieved, he said.
As the Brexit headwinds have grown, money markets have pared back expectations for rate rises, with a 25 basis point BoE hike now no longer fully priced in until at least August 2020. Pickering still thinks that wage growth pressures and inflation expectations in Britain are strong enough to justify two rate hikes in 2019, the first in May, so long as parliament passes Prime Minister Theresa May's Brexit deal with the European Union.
Intensifying concerns about her ability to win parliamentary approval for her deal in January continue to overshadow trading of the pound. Sterling, however, earlier got a small boost from retail sales data, which showed sales volumes in November jumping by 1.4 percent from October, surpassing forecasts in a Reuters poll of economists that had pointed to a 0.3 percent gain. The "retail sales numbers have shown that the UK consumer is still alive and well despite two months of negative readings," said Michael Hewson, an analyst at CMC Markets.
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