Pound drops as growth concerns complicate BoE rate decision

Band Sujata Rao

LONDON, November 1 (Reuters)The pound slipped on Monday, hitting its lowest level in more than two weeks against the dollar, under pressure from uncertainty over Bank of England policy and a post-Brexit escalation with France over Fish.

High German and US inflation last week prompted an aggressive revaluation of interest rate bets in these markets. While two Bank of England rate hikes are expected by the end of the year, concerns about UK economic growth are preventing the currency from fully benefiting from rate expectations and surging gilt yields.

A weekly treasury bill auction returned an average yield of 0.216773%, down from 0.135% when it sold last week.

“Currency investors have become more concerned with the backdrop of inflation amid hawkish changes by many central banks. This has, in turn, reduced levels of risk appetite and the scale of the upward pressure on the pound sterling / dollar, ”Foreign Exchange Strategy at BMO Capital Markets said.

This meant that “the BoE’s hawkishness is unlikely to translate directly into an appreciation of the pound against the dollar in the current environment,” he added.

The British pound lost 0.2% at 09:00 GMT, to $ 1.3657 GBP = D3, and against the euro it fell 0.3% to 84.7 pence, moving further away from the 20-month high of 84.03 pence reached last week EURGBP = D3.

Most expect the BoE to hike rates by 15 basis points to 0.25% on November 4, although a split vote is likely and some even believe the bank could hold back the fire, settling for ‘a hawkish signal.

With economic growth under pressure after Brexit, the UK bond yield curve has flattened more than that of the Eurozone or its US peers, the spread between 2yr / 5yr and 5yr / 30yr yields tapering to around 30 basis points GB2GB10 = RR, GB5GB30 = RR.

Nomura analysts are among those who expect the BoE to wait until December before recovering, adding that “it would be prudent for the Bank to wait until more information is received from the market. job”.

In addition to growth concerns, there is the post-Brexit dispute with the European Union over trade agreements with Northern Ireland and even more a fishing dispute with France. Britain on Monday warned France to back down within 48 hours or face legal action.

UK ministers are also discussing the repercussions of triggering Article 16, which allows the UK to stop following parts of the Northern Ireland protocol as part of the Brexit deal.

Chart: Global exchange rates in 2020http://tmsnrt.rs/2egbfVh

Chart: Trade-weighted pound sterling since Brexit votehttp://tmsnrt.rs/2hwV9Hv

(Reporting by Sujata Rao; Editing by Subhranshu Sahu)

((sujata.rao@thomsonreuters.com; +44 207 542 6176/020 7536 7473/44 7990567646))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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