Sterling holds around three-week lows ahead of central bank meetings

Bank of England heads into its most unpredictable interest rate decision in years on Thursday

  
Pound coins are seen in the photo illustration taken in Manchester, Britain September 6, 2017.

Pound coins are seen in the photo illustration taken in Manchester, Britain September 6, 2017.

REUTERS/Phil Noble

Sterling was broadly unchanged on Wednesday but within striking distance of its almost three-week lows versus the dollar and the euro ahead of crucial central bank policy meetings in Britain and the United States.

Investors expect the Federal Reserve to detail plans to end its pandemic-era bond purchases by mid-2022 on Wednesday as policymakers shift their focus towards what to do about a surge in inflation that is lasting longer than expected.

Meanwhile, the Bank of England heads into its most unpredictable interest rate decision in years on Thursday.

Sterling by 0906 GMT, was flat against the dollar at $1.3616 not far from the low of $1.3606 hit on Oct. 13 -- and against the euro at 85.07 pence .

Sterling traders are keen to understand the Fed's inflation outlook and whether its timeline for rate normalisation might encourage the BoE to delay hiking.

“We had felt that EUR/GBP could correct to 0.8500 on our baseline scenario of a split BoE vote to hike and some indirect protest (about the current market pricing of future interest rates) via the comsumer price index (CPI) forecast,” ING analysts said.

But "slightly higher levels - e.g. 0.8540/60 - could be seen on BoE-day tomorrow", they added.

HSBC analysts saw three possible outcomes from Thursday's BoE meeting: a 15 bps rate rise, with or without the central bank pushing back on market pricing of future interest rates rise, and no rise at all.

But only "one of the three (scenarios) is likely to generate sterling strength", they said, adding they maintained a short GBP-USD trade idea targeting 1.3450.

But even in the more hawkish outcome - a rate hike without the BoE pushing back market expectations - the pound would "struggle to move beyond recent highs around 1.3850 until the market expects a more sustainable hiking cycle", they added.

A calmer tone took hold in a spat over fishing between London and Paris which has weighed on the pound, as French transport minister Jean-Baptiste Djebbari said Britain had shown a "constructive" spirit in the talks.

(Reporting by Stefano Rebaudo; Editing by Alison Williams)


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