Friday, 13 March 2015 15:16
LONDON: Sterling traded near its lowest in 20 months against the dollar on Friday and on track for its second straight week of losses, hurt by Bank of England Governor Mark Carney’s comments that he was in no rush to raise interest rates.
Those comments left some investors questioning whether the BoE would start to hike interest rates early next year, as is being expected currently.
Governor Carney said on Thursday the recent strengthening in the pound could keep inflation low and result in a slower pace of rate hikes from the BoE. He reiterated those comments in a newspaper interview on Friday.
While sterling has lost ground against the dollar, it has risen to more than six-year highs against a trade-weighted basket of currencies, mainly on the back of its significant gains against the euro.
Sterling was trading at $ 1.4850, having fallen to $ 1.4845 earlier in the day. The euro was down 0.15 percent at 71.36 pence, with the single currency back under pressure, due to the one-trillion euro asset purchase programme launched by the European Central Bank earlier this week.
“Sterling is performing poorly,” said Chris Turner, head of currency strategy at ING.
“Carney hinted that persistent strength of sterling could delay tightening — two-year rate swap rates have fallen 10 basis points this week. We expect sterling/dollar to press major support at $ 1.4815/30.”
In the options market too, there was bad news in store for sterling as Britain heads into a period of uncertainty stemming from the most closely fought general elections in decades.
Opinion polls show the ruling Conservatives and the opposition Labour neck-and-neck, making a hung parliament a strong likelihood and spelling a lengthy period of uncertainty.
The cost of hedging against volatility around the May 7 election date and the weeks after continued to rise, with the two-month sterling/dollar implied volatility rising to 12.15 percent, the highest since October 2011.
Hedge funds are putting bearish bets, with the two-month sterling/dollar risk reversals showing its highest bias for pound weakness since September 2014.
Lee Hardman, a currency analyst at Bank of Tokyo Mitsubishi said that while sterling is likely to perform relatively this year, “downside pressures may intensify temporarily heading into and in the aftermath of the general election in May.”
Copyright Reuters, 2015
