Sterling was set for its first weekly loss in four against the dollar on Friday as investors looked ahead to Britain’s negotiations on leaving the European Union after the Bank of England showed no sign of leaning more towards raising interest rates. Thursday’s BoE rates decision quashed some bets in the market that more policymakers would join outgoing Kristin Forbes in voting for a rate hike. Together with the Bank’s trimmed UK growth forecast and a release of weak industrial output data, that helped pull the pound below $1.28.
After recovering some ground at the end of the day on Thursday, sterling was back under pressure and 0.2 percent lower at $1.2863 by 0805 GMT. That added up to an almost 1 percent loss for the week, its first since the week ended April 4. It is still up more than 2 percent since British Prime Minister Theresa May’s surprise call in the middle of the month of a June 8 election. It also fell 0.2 percent to 84.45 pence per euro.
Thu Lan Nguyen, the Commerzbank analyst, said the prospect of volatile negotiations between the UK government and the European Union were likely to weigh on sterling later in the year. A number of analysts were surprised by the bank’s assumption in its forecasts that the talks would go smoothly. “We’re relatively pessimistic, contrary to the view that these negotiations will evolve rather smoothly,” she said.
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“Looking at the developments over the last couple of weeks and the tensions that have built between the two parties, I’m not agreeing with the assumption that the BoE is making in its forecasts, which overall were relatively optimistic.” The BoE trimmed its prediction for growth this year but upped it for 2018 and 2019, hinging on a big pick-up in wage growth and stronger exports and investment — things the central bank has predicted before, but which have largely not materialised.
Governor Mark Carney said the BoE had not tried to forecast what would happen if there was a “disorderly Brexit” where Britain crashes out of the EU without an agreement on future trade relations. So far, the election campaign, in which Theresa May’s Conservative party is expected to secure a landslide majority, has had little day to day impact on the pound.
“(Historically) sterling has tended to put in an improved performance when the Conservative party has done relatively better in opinion polls,” wrote Simon Derrick, chief markets strategist at Bank of New York Mellon, in a note to clients. “In 1997 this happened even though there was no realistic chance of a Conservative victory emerging. This suggests that relative shifts in polling in the runup to an election can have an impact on sterling even if the absolute gap between the two main parties remains substantial.”