US economy

Sterling falls to fresh 21-month low versus dollar

© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger//File Photo

(Reuters) – Sterling fell to a new 21-month low against a strengthening dollar on Wednesday after Britain’s weak economic outlook and higher than expected government borrowing dented the Bank of England’s (BoE) monetary tightening narrative.

Money markets have been scaling back bets on the size of BoE rate hikes, pricing in around 140 basis points (bps) worth of tightening by year-end from 160 bps last Friday. [IRPR]

Data showed that government borrowing in the 2021/22 financial year was almost 20% higher than forecast.

Optimism among British manufacturers has fallen at its fastest pace since the coronavirus crisis, a survey showed on Monday, adding to signs of a slowdown in the economy on the back of rising inflation.

“We think markets may be positioning a bit too much on the bearish side of sterling ahead of next week’s BoE meeting, and the drop is starting to look stretched,” ING analysts said.

The pound was down 0.2% at $1.2547, after falling to a fresh 21-month low at $1.2543.

The pound rose 0.1% versus a weakening euro to 84.50 pence after hitting its lowest since April 12 on Tuesday.

The , which measures its value against a basket of foreign currencies, rose 0.3% to 102.2 on safe-haven flows fanned by slowing growth in China and Europe.

“, however, could remain vulnerable as the dollar retains some momentum,” ING analysts said. “The 1.2500 support could prove a rather strong one.”

The BoE, which convenes its Monetary Policy Committee next Thursday, looks set to take its first steps towards selling some of the 875 billion pounds of government bonds it amassed between 2009 and 2021, in a move which will trigger additional monetary tightening.

But ING analysts recently argued that the bank might hold off selling gilts due to the weak economic backdrop.

The BoE said it would be “considering beginning” outright bond sales when its main interest reached 1%, which is supposed to happen next week according to market expectations.


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