July 6, 2017 / 8:42 AM / 5 months ago

Sterling steadies as investors brush off weak post-election data

* 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 Jemima Kelly

LONDON, July 6 (Reuters) - Sterling steadied in a quiet morning of trading on Thursday, with a run of weaker British economic data failing to deter investors from bets that the Bank of England will hike interest rates in the coming months.

Though the pound has weakened a little this week as purchasing managers’ index (PMI) surveys have pointed to a cooling economy, it is still only around a cent away from nine-month highs hit against the dollar in May.

It was flat on Thursday at $1.2935 and at 87.74 pence per euro.

Its recent strength, say analysts, is largely down to expectations of monetary tightening from the BoE, with some investors betting on a rate hike as soon as next month.

Analysts from Morgan Stanley wrote in a note to clients that despite data pointing to weakness following June’s parliamentary elections they were “loving” sterling, and noted that “soft” indicators such as PMI surveys had also dipped immediately after last year’s Brexit vote, before recovering.

“Our sterling optimism finds its sterling in what we call ‘Brexit economics’ and the BoE reconsidering GBP weakness and its impact on the economy,” they wrote.

“Sterling weakness has undermined living standards, and with inflation above the BoE’s 2 percent target and its own staff projections, stabilisation should now be on the BoE’s agenda. Talking up rate expectations is a sufficient tool to reach this target.”

A number of BoE policymakers, including Governor Mark Carney, have spoken in recent weeks in favour of soon reversing last year’s interest rate cut, which followed Britain’s vote to leave the European Union.

The hawkish remarks have helped the pound to reverse the 2 percent drop against the dollar that came after a snap election on June 8 left no party with a clear majority.

But some investors are still anxious about Britain’s economic prospects as it negotiates its way out of the EU, and about political instability.

“The BoE is the toughest call because the UK economy has outperformed and inflation has ramped up. However, the odds that Brexit leads to economic underperformance seem high enough to make us wonder how much of a bad streak the BoE would be willing to contemplate before taking hikes off the table,” wrote Steven Englander, head of research at hedge fund Rafiki Capital.

“Carney’s hiking comment in Sintra was pretty conditional at the end of the day,” he added, referring to the BoE governor’s saying that a rate rise was likely to be needed as the economy comes closer to running at full capacity, and that the central bank would debate when to do so “in the coming months”. (Editing by Andrew Roche)

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