Sterling was set for its first weekly loss in four against the dollar on Friday after the Bank of England showed no sign of leaning more towards raising interest rates before the start of Brexit negotiations. Thursday's BoE rates decision quashed some bets in the market that more policymakers would join outgoing Kristin Forbes in voting for a rate hike. Together with the Bank's trimmed UK growth forecast and weak industrial output data, that helped pull the pound below $1.28.
After recovering some ground at the end of the day on Thursday, sterling was back under pressure and 0.1 percent lower at $1.2871 by 0409 GMT. That added up to an almost 1 percent loss for the week, its first since the week ended April 4. It is still up more than 2 percent since British Prime Minister Theresa May's surprise mid-month decision to call a June 8 election.
The pound also fell 0.7 percent to 84.87 pence per euro after the single currency saw broad buying following some weak US data. Commerzbank analyst Thu Lan Nguyen said the prospect of volatile negotiations between the British government and the European Union were likely to weigh on sterling later in the year. A number of analysts were surprised by the BoE's assumption in its forecasts that the talks would go smoothly. "We're relatively pessimistic, contrary to the view that these negotiations will evolve rather smoothly," she said. "Looking at the developments over the last couple of weeks and the tensions that have built between the two parties, I'm not agreeing with the assumption that the BoE is making in its forecasts, which overall were relatively optimistic."
The BoE trimmed its prediction for growth this year but upped it for 2018 and 2019, hinging on a big pick-up in wage growth and stronger exports and investment - things the central bank has predicted before, but which have largely not materialised.
Governor Mark Carney said the BoE had not tried to forecast what would happen if there was a "disorderly Brexit" where Britain crashes out of the EU without an agreement on future trade relations. So far, the election campaign, in which Theresa May's Conservative party is expected to secure a landslide majority, has had little day to day impact on the pound. "The general trend hasn't really changed. The pound's been quite well suppported ever since it broke higher on the news that Theresa May called the snap election," said David Cheetham, chief market analyst at XTB, adding he saw buying interest for the pound at $1.2850. "If we start to see some polls suggesing it could be not quite a big majority (for May), then we could get some softness in the pound but for now I think it seems fairly well supported."