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Sterling slips back towards US$1.30 as Transatlantic rate paths diverge

Tuesday, August 30, 2016 - 17:03

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Sterling slipped back towards US$1.30 on Tuesday on divergent expectations for monetary policy, with investors increasingly betting US interest rates could rise by year-end while British rates may be cut again.

[LONDON] Sterling slipped back towards US$1.30 on Tuesday on divergent expectations for monetary policy, with investors increasingly betting US interest rates could rise by year-end while British rates may be cut again.

With London markets closed on Monday for a national holiday, Tuesday marked the first full day of trading there since US Federal Reserve chair Janet Yellen and vice chair Stanley Fischer left the possibility of a near-term rise in US rates on the table, boosting the dollar.

Investors are now pricing in around a 55 per cent chance of a rate hike by the end of the year, according to CME FedWatch.

In contrast, the Bank of England earlier this month cut rates to a record low of 0.25 per cent and relaunched asset purchases in an effort to boost the economy following Britain's vote to leave the European Union. Many expect policy to be eased further.

Sterling has fallen more than one per cent against the US dollar since Friday's comments from Ms Yellen and Mr Fischer at a meeting of global central bankers, and on Tuesday it traded 0.2 per cent lower on the day at US$1.3076. Against the euro it was flat at 85.40 pence.

"The retreat... back towards the US$1.30 level captures our view that part of the squeeze higher in the pair had been due to a softer dollar," said ING currency strategist Viraj Patel.

"The BOE's easing bias, softer UK economic data and sterling's role as a funding currency will all keep the bearish... momentum in place."

Though data covering the months since June's vote for Brexit suggests the economy has held up reasonably well, investors remain anxious that foreign inflows of capital will dry up, leaving Britain's already huge current account deficit vulnerable to further widening.

Data released on Friday showed sterling net short positions hit a record high of 94,978 contracts in the week to Aug 23. The pound's net short position has hit record highs for six straight weeks.

"It is becoming increasingly clear that Brexit has left sterling inherently pressured...," said FXTM analyst Lukman Otunuga.

"Sentiment remains firmly bearish towards the pound with further declines expected as expectations mount over the BOE cutting UK interest rates to near zero in a bid to reclaim economic stability... The divergence in monetary policy between the Fed and BOE could encourage a further decline back towards US$1.2900."

REUTERS

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