February 8, 2017 / 10:09 AM / 5 months ago

Sterling steadies around $1.25 as BoE hints hold focus

4 Min Read

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By John Geddie

LONDON, Feb 8 (Reuters) - The British pound steadied around $1.25 on Wednesday after a series of swings a day earlier driven by competing signals on the outlook for growth, interest rates and Britain's withdrawal from the European Union.

Kristin Forbes, an external member of the BoE's Monetary Policy Committee, said in remarks published on Tuesday that the Bank should raise interest rates soon if British economic growth remains solid and inflation continues to accelerate.

The BoE's regional agents report due Wednesday may give some further insight into Forbes' thinking. Policymaker Jon Cunliffe, who has previously said the fall in the pound on the Brexit vote made rate decisions trickier, is due to speak at 1300 GMT.

At its meeting last week, the BoE voted unanimously 9-0 to keep rates on hold at a record low of 0.25 percent but raised its 2017 growth forecasts further while declining to do the same with its inflation outlook.

"The BoE is unlikely to raise rates soon, but it could become more likely later this year if growth holds up, inflation expectations continue to rise, and wage growth proves stronger than expected which would offer more support for the pound," said Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.

The pound was up 0.2 percent against the euro and little changed against the greenback at $1.2496 on Wednesday, having bounced back strongly from a two-week low of $1.2347 hit on Tuesday.

After that wild ride, three-month implied volatility - options contracts that allow traders to bet or hedge against swings in the currency - rose to their highest level since mid-January.

Strategists at Credit Agricole warned that the pound "will need to be careful not to get too far ahead of itself" with investors waiting for the outcome of the final vote in parliament on Article 50 later on Wednesday, before the legislation passes to the upper chamber for approval.

Britain will not seek further talks with the European Union if parliament rejects the exit deal it reaches, the government said on Tuesday, as ministers pushed back attempts to give lawmakers more say on the terms of the final agreement.

The closest vote to date saw seven Conservative lawmakers defy the wishes of their leader and join forces with rival parties to demand a more meaningful vote on the exit terms, but the government won by 326 votes to 293.

In a further risk for the currency, which some banks including Goldman Sachs have said could fall another 10 percent this year, analysts pointed to polls showing Brexit had boosted support for Scottish independence.

A majority of Scots backed staying in the EU, and the Scottish National Party (SNP), the biggest party in Scotland's parliament, has said there should be another independence vote if its views on Brexit are rejected.

Scotland's devolved parliament rejected May's plans for how to exit the EU in a symbolic, non-binding vote on Tuesday, a demonstration of the divisions between London and Scotland when it comes to Brexit. (Editing by Andrew Heavens)

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