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Sterling dips as markets brace for dovish Carney speech
August 27, 2013 / 2:37 PM / 4 years ago

Sterling dips as markets brace for dovish Carney speech

* Pound trades near 2-week low vs dollar, 3-week low vs euro

* Expectation that Carney could try to talk down market rates

* German business morale surges, helps euro gain vs sterling

By Anooja Debnath

LONDON, Aug 27 (Reuters) - Sterling slid to its lowest in weeks against the dollar and the euro on Tuesday on expectations that Bank of England chief Mark Carney may try to talk down market interest rates and reaffirm his dovish stance.

Many market players anticipate that, in a speech in Nottingham on Wednesday, Carney will look to rein in the sharp rise in UK money market rates following a run of strong UK economic data and reiterate a pledge to keep interest rates at their current record low of 0.5 percent.

Yields on benchmark British government bonds fell to a two-week low on Tuesday of 2.579 percent. Gilt prices were supported by the prospect of gilt coupon payments and also by safe-haven flows on tensions over Syria.

Sterling was down 0.3 percent at $1.5537, having hit a trough of $1.5482, which was its lowest since mid-August. Initial support was at $1.5514, its 200-day moving average.

The euro was up 0.3 percent at 86.09 pence, close to the intra-day peak of 86.17 pence which was its highest since August 9. Chartists cited initial resistance at the April 17 high of 86.37 pence.

The euro was helped by data which showed German business morale had risen to its highest in over a year.

“There is some weakness in sterling ahead of Carney’s speech,” said Angus Campbell, head of market analysis at FxPro.

“Because sterling had bounced quite strongly since the beginning of August, traders are perhaps returning to reality and thinking Carney might talk down rate hike expectations and reiterate why he is so dovish with his forward guidance.”

Carney pledged early in August to keep rates low until unemployment falls to 7 percent, which the bank sees as unlikely for another three years. But improving economic data had fanned expectations that rates will rise sooner than that.

BoE Deputy Governor Charlie Bean said on Monday the central bank had sent a “clear signal” that interest rates are not likely to rise imminently.

UK data released overnight showed business volumes in services firms surged to their highest since 2007 in the past three months and further growth was expected.

Sterling overnight interbank average rates (SONIA) were pricing in a first rate rise by around mid-2015, essentially unchanged from last Friday. UK markets were closed on Monday.

If Carney succeeds in convincing markets that rates will stay low, while data out of the euro zone continues to be encouraging, the euro could see further gains against sterling.

A series of speeches by European Central Bank policymakers this week could indicate that “the (ECB) governing council is divided about the need for further easing from here,” said Valentin Marinov, head of European G10 FX strategy at Citi, adding in contrast, Carney’s speech “could weigh on sterling and support euro/sterling.”

The divergence between British and German 10-year borrowing costs narrowed, pointing in favour of the euro.

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