Pound Under Fire As Risk Of Smaller-Than-Expected BOE Hike Haunts Market 

(Bloomberg) -- The pound tumbled against a resurgent dollar before the Bank of England's interest-rate meeting on Thursday, as concern mounted that a smaller-than-expected hike could compound sterling's drop. 

The UK currency sank 1.3% to $1.1245, its weakest level since Oct. 24, as indications by Federal Reserve Chair Jerome Powell that the US hiking cycle is nowhere near done bolstered the greenback. The pound has already dropped more than 3% this week against the dollar, the worst performance among major currencies tracked by Bloomberg.

There may be worse to come if the BOE raises its key rate by 50 basis points rather than the jumbo three-quarter point increase that's broadly expected, further widening the interest-rate differential between the pound and the dollar. Economists at Citigroup Inc. and ING Bank BV are among those predicting a smaller move.

There is “scope for a 50 basis point BOE surprise today,” Chris Turner, FX strategist at ING wrote in a note, adding that the pair could hit $1.115 were that to materialize. 

While inflation remains at a record pace in the UK, the risk of a severe recession is high, potentially limiting how high interest rates can go. That contrasts with the US economy, which has shown remarkable resilience even as the Fed's benchmark rate climbs to a 3.75%-4% range. 

Citigroup is also calling for a 50 basis point hike from the BOE. While that would be a “bullish surprise” for UK bonds, it could increase pressure on the long-end, which the US bank believes has rallied too far after its exclusion from the central bank's active sales.

“The surprise of 50bp -- together with a likely awful growth outlook based on market pricing for terminal rates -- should help bull-steepen the curve,” Citi strategists including Jamie Searle wrote in a note. 

The pound also fell against the euro, sending the pair as much as 0.7% higher to about 86.80 pence. 

--With assistance from .

(Updates with chart, additional context.)

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