The British pound weakened against a stronger U.S. dollar as investors awaited the Bank of England’s monetary policy decision, with markets widely expecting the bank to leave interest rates unchanged, though potential adjustments to its government bond sale program could be announced.
Sterling fell 0.13% to $1.36125, after touching its highest level since early July in the previous session at $1.3726.
The U.S. dollar extended gains, continuing its recovery after briefly sliding to a three-and-a-half-year low earlier, as markets responded to the Federal Reserve’s cautious stance on further rate cuts.
Investor focus remains on the Bank of England, which is expected to keep rates at 4% while scaling back the pace of its annual £100 billion government bond sales in response to recent volatility in debt markets.
The deputy chairman of U.S. investment bank Evercore noted that the meeting could deliver a hawkish message on interest rates, but may surprise markets with a more dovish approach to next year’s quantitative tightening program. He added that the Bank of England may reduce its bond sales more than expected, possibly to £60 billion, or shift sales toward shorter-dated maturities.
Data showed that U.K. inflation stood at 3.8% year-on-year, reinforcing expectations that no further rate cuts are likely in the near term.
Deutsche Bank said in a note that the main focus would be on any changes to the BOE’s forward guidance, as well as its quantitative tightening decision. Sanjay Raja, the bank’s chief U.K. economist, warned of a “significant risk” that policymakers could drop their language of “gradual and cautious” rate cuts. Raja expects the Bank of England to reduce its quantitative tightening target from £100 billion to around £70 billion, within a range of £65 to £75 billion.
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