On Friday, sterling reached a three-week low against the dollar as hesitation over projections for the British economy reduced bets that a Bank of England rate increase could induce a sustained tightening cycle.
An increase in borrowing costs is heavily weighted in the market, after the next BoE policy meeting in early November it will not be followed by additional rate increases is bringing the pound down.
While the United States is repealing years of record-low interest rates, the probable BoE rate increase will be Britain’s first in over ten years. With rates projected to double, this would only oppose actions taken by the Bank to alleviate the influence of the Brexit last year.
“Raising interest rates should always probably be followed by a stronger currency. But that may not be the case next week,” said economist Edward Hardy. Adding, if the BoE does not agree all agree on the increase a continued cycle of tightened monetary policy would be improbable.
“It would add to the theory that next week’s hike – if and when it does take place – will be more of a move just to retrace action we saw in the wake of the Brexit vote last year,” Hardy said.
On Friday, sterling reached its lowest levels versus the dollar since Oct. 9 at $1.3070, then rallying to $1.3114 but remained down 0.3 percent. The pound did better against the euro, reaching highs that have not been seen since the beginning of the month.
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Additional evidence concerning the condition of the British economy and outlook for BoE interest rate policy could be provided by two U.K. credit rating reviews, Fitch and Standard & Poor‘s. Ambiguity over the advancement in Brexit negotiations and domestic political divisions remain to add downward pressure on the pound.
“News emerging about the Scottish First Minister challenging Theresa May to formally say whether the government is pursuing a transition deal adds to the Brexit headache,” said currency strategist, Alvin Tan.