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Sterling rises as rate hike seems likely

Wednesday, August 20 11:48:41

Sterling rebounded from four-month lows against the dollar today after Bank of England minutes showed two policymakers voted for an interest rate hike in August.

Martin Weale and Ian McCafferty both voted to start raising interest rates this month, becoming the first officials to do so in more than three years.

Some in the market had expected only one member of the bank's Monetary Policy Committee at most to vote for a rate rise and news that two members favoured such a move prompted the market to bring forward expectations for a first UK interest rate rise to five months' time.

After last week's Quarterly Inflation Report, which was perceived to be dovish, the market had pushed back forecasts for a rate rise to March, from late 2014.

Amid higher volumes, sterling rose to $1.6680, up 0.3 percent on the day and bucked the broad dollar uptrend . It hit a four-month trough of $1.6602 earlier in the day, its lowest since early April, and was last trading at $1.6645 up 0.2 percent on the day.

The euro was down 0.5 percent at 79.69 pence, hitting its lowest in a week. The euro had hit a two-month high of 80.37 pence last week after the Inflation Report.

Traders said the pound was unlikely to rise much, especially given that inflation was well below the BoE's target of 2 percent and wages were yet to show signs of picking up, suggesting considerable slack in the British economy.

"Most MPC members found that there weren't sufficient inflation pressures to justify hiking interest rates just yet; this argument is now firmly backed by yesterday's CPI data," said Alex Edwards, head of corporate desk at UKForex.

"Most members also want to see more evidence of wage growth before raising rates, and so despite the surprise vote, yesterday's inflation data is dampening the positive impact on the pound."

Consumer prices rose 1.6 percent on the year in July, well below forecasts of a 1.8 percent reading, data showed on Tuesday. Month-on-month, the consumer price index fell 0.3 percent.

Sterling had been the best performer by far among major currencies in the year to the start of July, pushed up by expectations the BoE might start raising interest rates to cool the economy as early as November.

But while economic growth is robust, rate hike expectations have now been pushed back because wages are not yet rising in real terms. As a result, the sterling trade-weighted index has shed 2 percent since it hit a six-year high against the dollar in mid-July.

Still, risks that more members could join the two hawkish policymakers on the committee in coming months could support the pound, especially against the euro.

"On balance the minutes should ease recent sterling weakness somewhat, but we prefer to keep longer positions through euro/sterling shorts," said Josh O'Byrne, currency strategist at Citi. (Reuters)

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