September 29, 2016 / 7:52 AM / a year ago

Sterling steadies above $1.30, but gains seen capped

LONDON, Sept 29 (Reuters) - Sterling held steady above $1.30 on Thursday, supported by improved risk appetite in global markets, although expectations that the Bank of England might further ease monetary policy in coming months checked gains.

Those expectations got a boost when outgoing Bank of England Deputy Governor Minouche Shafik said a rate cut in 2016 would hinge on data, but that she would rather act pre-emptively.

Shafik’s comments contrasted with those of fellow policymaker Kristin Forbes, who last week said she saw no case for a further rate cut. Forbes is due to speak later in the day and hawkish comments could give sterling a slight boost.

Sterling was flat at $1.3025, having struck a five-week low of $1.2915 on Sept. 23, its lowest since mid-August. The euro was steady at 86.175 pence.

“We continue to see sterling as a vulnerable currency and expect further downside for the pound against both the dollar and the euro in the coming months,” Rabobank senior currency strategist Jane Foley said.

“We look for euro/sterling to move towards 88 pence by the middle of 2017 and sterling/dollar moving to $1.25 in this time frame.”

Investors worry that an exit from the single market will drag Britain into a recession and blow out Britain’s ballooning current account deficit, already among the highest in the developed world at about 5 percent of gross domestic product. A wider current account deficit tends to lead to a lower currency.

On Friday, Britain will release second-quarter current account deficit figures and forecasts are for a slight narrowing. But analysts expect foreign investments to be hit as the economy slows in the medium term, widening the external funding gap and potentially dragging the currency lower.

Analysts said data which surprised on the upside in the past few weeks was showing signs of running out of steam. The latest survey from the Confederation of British Industry showed that retail sales fell unexpectedly in September.

“Market expectations for BoE easing continues to look too conservative in our view, with 5 basis points of rate cuts priced for the November meeting versus our economists’ expectations for a 15 basis point cut,” BNP Paribas strategists said in a note.

“Our economists think data for the remainder of the year will signal the economy slowing down further, supporting November action. We think sterling is likely to weaken over the coming weeks.” (Reporting by Anirban Nag; Editing by Louise Ireland)

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