* 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 Patrick Graham
LONDON, March 22 The pound flattened out on
Wednesday after hitting its highest levels in almost four weeks,
speculation that the Bank of England will raise rates within the
next year cooled by broader concerns about a Brexit-driven
slowdown in the UK economy.
Sterling has surged 3 percent in the past week, driven by a
turnaround in the dollar and BoE minutes last week that showed a
number of policymakers on the verge of voting for a rise in
Another jump in inflation numbers on Tuesday pushed money
markets close to fully pricing in a rise in rates within the
next 12 months to prevent another dive in the currency that
would raise prices of imported goods further.
But many think the bank is simply using hawkish rhetoric on
rates to address both sterling's weakness and rising inflation
Analysts also point to the jousting with Brussels that is
expected to accompany the start of EU exit talks next month as
likely to weigh on the currency.
"In general, central bankers take currency moves as an input
and a bit as a given. They will tend to look through these types
of factors," said Valentijn van Nieuwenhuijzen, chief investment
strategist with Dutch financial group NNIP.
"At the same time, the BOE will have been surprised by the
resilience of the UK economy (last year) so there are some
arguments that say that there is the risk (of a rate rise)."
The pound fell around half a cent after reaching as high as
$1.2507 in Asian trading. By 0908 GMT, it was 0.1 percent lower
at $1.2464 and 0.1 percent stronger against the euro at
Several of the currency world's top 10 banks, who were more
cautious on the pound at the end of last year, have been
aggressive again in the past month in predicting more declines,
pointing to both the political risks of the Brexit talks and
signs of weaker growth.
UK retail sales data on Thursday will be another test of
whether and how quickly the economy is slowing. Dealers said
sterling would struggle to pass $1.25 without another round of
broader dollar weakness.
"The big near-term risk is retail sales," said Societe
Generale strategist Kit Juckes.
"If higher inflation meets softer wage growth and triggers
slower consumer spending at the same time as political
uncertainty increases, I can't see anything good for sterling,
valuation and positions notwithstanding."