Sterling retreats from 5-month high

London

STERLING retreated from a five-month high on Wednesday after the governor of the Bank of England said that recent currency strength would affect monetary policy and the central bank lowered its growth forecasts for Britain in a quarterly report.

The BOE expects growth this year to come in at 2.4 per cent, it said in its quarterly Inflation Report, down from a 2.9 per cent projection in February and closer to what most other economic forecasters expect.

Speaking to reporters after the report was released, BOE chief Mark Carney said that it was right to consider the strength of the pound when projecting the path of future interest rates. Investors are expecting the BOE to lift rates sometime in the middle of 2016 and a stronger currency could keep inflation in check and push back rate hike expectations.

The pound fell to a low of US$1.5635, down 0.1 per cent on the day, and moving away from a five-month high of US$1.5749 struck earlier. "The Inflation Report was more dovish than the markets were expecting, prompting heavy selling in the pound," currency trading firm Oanda's senior analyst, Craig Erlam, said.

"The central bank did highlight the stronger pound as a headwind and stressed that it is relevant in its policy horizon which again weighed on the pound during the press conference."

The euro, meanwhile, held on to gains, drawing support from a narrowing yield gap between Bunds and US Treasuries, but slipped from earlier highs after eurozone growth data fell short of expectations.

Gross domestic product in the 19 eurozone countries rose 0.4 per cent quarter-on-quarter in the January-March period for a one per cent year-on-year rise.

That was below forecasts for a 0.5 per cent quarterly expansion and a 1.1 percent annual gain. Earlier, German growth data had disappointed and offset any positive impact from better-than-expected French figures.

With German sovereign yields rising at a faster pace than US ones in recent days, the gap between 10-year Bunds and US Treasuries narrowed to about 157 basis points, from about 180 basis points about a month ago. That, in turn, was underpinning the euro.

The euro nosed up 0.1 per cent to US$1.1225 and also outpaced the British pound, trading up 0.2 per cent at 71.68 pence." REUTERS