* 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
(Adds Market, BoE surveys)
By Patrick Graham
LONDON, March 22 The pound flattened out on
Wednesday after hitting its highest levels in almost four weeks,
as speculation that the Bank of England will raise rates within
the next year was cooled by broader concerns about a
Brexit-driven economic slowdown.
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 using hawkish rhetoric on rates
to address both sterling's weakness and rising inflation
expectations at a time when measures of consumer sentiment and
demand are looking shaky.
A monthly indicator run by financial data company Markit
showed households at their most downbeat since 2013
. The Bank of England's regular survey of firms
pointed to a greater willingness to invest but also expectations
that retail sales would be weakened by higher prices.
"There are a few signs to suggest that (consumer) demand
could be slowing but we haven't seen enough yet to be sure,"
said Rabobank strategist Jane Foley.
"The survey data for Feb again suggests that people are
steering away from more expensive goods. I think most of the BOE
are seeing it that way, but they will come out with hawkish
comments mainly to control sterling."
Several of the currency world's top 10 banks, who were more
cautious on the pound late last year, have been aggressive again
in the past month in predicting more declines, pointing to the
political risks of Brexit talks starting next month.
That encourages the Bank of England to defend the currency
for fear of another jolt to import prices if it weakens again
sharply. But any rise in interest rates would also be liable to
hit household budgets given the high levels of mortgage
borrowing over the past two decades.
"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 after reaching as high as $1.2507 in Asian
trading. By midday in London, it was a quarter of a percent
lower at $1.2444 and 0.1 percent weaker against the euro
at 86.68 pence.
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."
(Editing by Richard Lough)