Sterling holds steady as traders wait for BoE decision

The pound was little changed on Tuesday as investors looked towards an uncertain Bank of England interest rate decision on Thursday.

Sterling has risen more than 6% this year as the BoE has hiked interest rates to deal with stubbornly high inflation, and as the dollar has slipped as U.S. price pressures have cooled.

It peaked at a 15-month high of $1.314 in the middle of July before falling after data showed British inflation came in lower than expected at 7.9% in June.

The pound was down just 0.1% against the dollar on Tuesday at $1.283.

Traders think there is a 62% chance that the BoE hikes interest rates by 25 basis points last week, which would take them to 5.25%.

They see a 38% chance of a bigger 50 bp hike, according to pricing in derivatives markets.

“With inflation falling, house prices falling and economic sentiment gloomy, a 25 bp hike with a warning there could yet be more to come would seem sensible,” said Kit Juckes, chief global FX strategist at Societe Generale (EPA:SOGN), in a note to clients.

“But given where expectations are that leaves GBP vulnerable this week. 25bp from the Bank, and solid US data, could easily drag GBP/USD back below $1.25.”

The euro was flat against the pound at 85.64 pence on Tuesday.

Data on Tuesday painted a weak picture of the British economy which, although it has been more resilient than expected at the start of the year, is barely expanding.

British house prices dropped by the most since 2009 in the 12 months to July as rising interest rates took a toll on the market, mortgage lender Nationwide said.

Separate data showed that British factory output fell at the fastest pace in seven months in July, matching a trend seen around the world.

Market pricing shows investors expect the BoE to lift rates to around 5.8% by early 2024. That’s down sharply from early July when rates were expected to rise to 6.4% or higher.

The Dollar index – which tracks the currency against six peers – was up 0.226% at 102.12 on Tuesday.