Sterling up after biggest daily loss in month, outlook wary

[LONDON] Sterling bounced on Friday, a day after posting its biggest daily loss in a month, as some investors consolidated positions after the Bank of England kept interest rates at record lows and lowered its growth and inflation forecasts.

"I find it a little odd that the central bank is striking a dovish stance when underlying data is positive and UK company profitability is rising," said Martin Arnold, an FX strategist at ETF Securities in London.

The British pound edged 0.2 per cent higher to 1.316 in early trades on Friday, after falling more than 0.6 per cent on Thursday, its biggest daily drop since early July, according to Thomson Reuters data.

Before Thursday's central bank decision, sterling briefly rose to a 11-month high of US$1.3267 per US dollar, rounding off a strong 4.5 per cent rise over the last six weeks.

Markets focused on the Bank of England's lowering of its 2017 growth forecasts to 1.7 per cent from 1.9 per cent in May, as well as its unexpected reduction of its inflation projections. It now sees inflation at just under 2.6 per cent in a year's time after peaking around 3 per cent in October.

Although most economists taking part in a Reuters poll had forecast a six-two vote to keep rates on hold, some had thought that chief economist Andy Haldane could join those calling for an immediate increase.

Against the euro, sterling was a shade stronger at 90.26 pence after falling 0.8 per cent on Thursday.

Analysts at ING believe sterling will be driven more by Brexit-related headlines in the coming weeks than expectations of policy changes from the central bank.

"The outlook here is unlikely to be supportive - especially until we see more progressive steps towards a transitional deal," ING strategists said in a note.

REUTERS