Sterling hovered near 18-month lows against the dollar on Monday as investors bet that data on Tuesday is likely to show inflation dropping, keeping pressure off the Bank of England to raise rates. Traders also cited a $5.2 billion take-over by London-listed drugmaker Shire Plc of US group NPS Pharmaceuticals as a negative factor for sterling in early European trade. Sterling will need to be sold to buy dollars needed for completion of the transaction, traders said.
Britain's consumer price index (CPI) is forecast to have eased to 0.7 percent in December, hit by an almost 20 percent monthly fall in the price of oil. A drop below 1 percent would require BoE Governor Mark Carney to write an explanatory letter to Britain's finance minister George Osborne. A fall in inflation would bolster expectations that the BoE will wait until the second quarter of 2016 before it raises interest rates. That is a view that has changed dramatically in the past six months: last summer, many had expected a rate hike by the end of 2014.
That expectation push-back drove sterling to an 18-month low of $1.5034 last week. The pound stayed close to that low at $1.5145, down slightly on the day. Against the euro, sterling was flat at 78 pence. "The lack of investor attraction is continuing to weigh on the pound, with annualised inflation widely being seen as a potential major downside risk for the currency," said Jameel Ahmad, chief market analyst at FXTM.
Sterling has already fallen almost 3 percent against the dollar this month - more than it has in any month since February 2013 - as weaker-than-expected economic data has recalibrated the expectations of the BoE acting. Analysts also highlighted the risk to the currency from a slowdown in the euro zone and a national election in May that could hurt investments.
Many are worried that the prospect of a "hung" parliament where neither the ruling Conservative Party nor the opposition Labour can form a government and a drift towards the Eurosceptic UKIP party could hurt sentiment towards Britain. "Over the past few years, the pound has been a beneficiary of political stability," said Jonathan Webb, head of FX strategy at Jefferies. "We could see a 'hung parliament' and the pound will be vulnerable to that uncertainty."