(Bloomberg) -- Pound bulls may need Bank of England Governor Mark Carney to bring an interest-rate increase in May into play this week to drive further appreciation in the currency.
Sterling posted its first weekly decline against the dollar since mid-December, weighed by lower-than-forecast U.K. data and renewed scrutiny on Prime Minister Theresa May's future amid Brexit talks. The pound has been buoyed in part by expectations that the BOE could raise interest rates as soon as its May meeting. Still, traders may need more evidence of this and hints from the Feb. 8 policy announcement that a further increase may be in the cards this year to revive the rally.
“The BOE will have to sound extremely hawkish and signal that it may hike more aggressively, in order for the pound to benefit,” Commerzbank AG strategist Thu Lan Nguyen said in emailed comments. The German bank forecasts the pound will fall to $1.34 by year-end. “Uncertainty over Brexit negotiations remain high.”
The pound fell 0.3 percent last week to $1.4122 as of 4 p.m. Friday in London, having appreciated almost five percent this year. It weakened 0.3 percent to 88.06 pence per euro.
Rate Outlook
Money markets are pricing a 60 percent chance of a rate hike in May, from 39 percent a month ago and there are signs that analysts are increasingly confident about the prospect. UBS Group AG brought forward its rate forecast this week, though said that its new prediction is “explicitly conditional” on a transitional deal once Britain leaves the European Union.
NatWest Markets is also betting on a rate hike in May, and is sticking to its long-sterling recommendation against the Japanese yen. Analysts at the bank forecast two members of the BOE's Monetary Policy Committee will vote in favor of an increase this week, with market focus also on any references to insufficient tightening being priced in.
“While Brexit will dominate sentiment this year, the economy's gradual rehabilitation will at times be a powerful counterweight,” NatWest strategists led by Paul Robson wrote in a note.
To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Keith Jenkins, Anil Varma
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