Sterling slipped back below $1.30 in quiet trade on Wednesday, nearing a 2-1/2-week low, as investors looked to key data due next week for clues on the health of the British economy as the country prepares to leave the European Union. The pound had been supported in recent weeks by the view that the Bank of England would soon hike interest rates, perhaps even by the end of this year.
But despite BoE rate-setters last week trying to drive home the message that interest rates are likely to rise, the market focused on the fact that policymakers voted 6-2 in favour of keeping rates at their record lows. The Bank also revised down its growth and inflation forecasts, and warned of Brexit risks.
Having hit an 11-month high against the dollar before the BoE meeting, sterling has since lost around 2 percent. It was trading flat on Wednesday at $1.2998, close to the previous day's low of $1.2953. "A rate hike is now pretty much a 2018 story," said ING currency strategist Viraj Patel.
"The political risk for sterling hasn't quite faded yet, and could easily come back. The big event risks are in October, when we have the Tory party conference and Brexit talks. The pound strengthened 0.2 percent to 90.34 pence per euro, having hit a 10-month low the previous day, as investors bet the European Central Bank was moving towards tightening.
"It would take a lot for the market to change its 'Brexit bias'; even the sound of the UK accepting a transition period did little to turn the tide," said Nomura currency strategist Jordan Rochester. Rochester said market focus next week will be on UK consumer price inflation data, which are due along with wages and retail sales numbers, though he suggested that a lower-than-expected number was likely to have more impact that a higher-than-expected one.
"Given that high inflation previously was not enough to convince the Bank of England to hike, any disappointment in the release should further reduce the already low market pricing of a future Bank of England hike, and any upward surprise will likely be met with 'it won't hike either way'," he said.