Sterling slides as BoE rams home easing message

[August 09, 2016]  By Patrick Graham

LONDON (Reuters) - Sterling fell half a percent to a one-month low against the dollar on Tuesday, making it the biggest mover on major currency markets, after a prominent Bank of England policy hawk signaled his willingness to ease further.

After some initial gains, the dollar flattened out against a basket of currencies used to measure its broader strength <.DXY> and was 0.1-0.2 percent weaker on the day at $1.1077 per euro and 102.21 yen respectively.

The pound, however, fell back below $1.30 for the first time since the second week of July, driven by an opinion piece by Ian McCafferty in The Times that said the Bank could add to a package of easing unveiled last week if the economy slowed as much as sentiment surveys have suggested.

McCafferty, previously the lone supporter of higher interest rates on the BoE's policy committee, did caution that information on the scale of the economic downturn was still limited, however.

Overnight, the BRC measure of retail sales provided a more encouraging sign, rising by the most in six months.

"McCafferty really underlined the dovishness of the MPC last week," said Jane Foley, a strategist with Rabobank in London.

"But (reading the BRC data) consumers do seem to have been more robust than many had anticipated and ...in the BoE's minutes last week there were members concerned that some surveys might overstate the downturn."

Sterling, which has been under pressure since Britain's vote in late June to leave the European Union, fell to $1.2986 in early trade in London. It was a third of a percent weaker at 85.27 pence per euro.

The dollar had seen some early gains, underpinned by Fed funds futures prices indicating that traders see almost a 50-50 chance of a U.S. rate hike by December, according to CME Group's Fed Watch tool. That compares with 30 percent before a better-than-expected nonfarm payrolls report on Friday.

Productivity data for the second quarter are due later on Thursday.
 

An employee is seen walking over a mosaic of pound sterling symbols set in the floor of the front hall of the Bank of England in London, Britain 25, 2008. REUTERS/Luke MacGregor/File Photo - RTSM1CO

"The movements are very very minor overall," said Craig Erlam, senior market analyst with Oanda in London. "Maybe that will change with the productivity and the unit labor costs numbers this afternoon."

New Zealand's dollar was steady despite expectations that the Reserve Bank of New Zealand will cut interest rates by 25 basis points to 2.00 percent on Thursday, when regional forex liquidity is likely to be thinner than usual due to a public holiday in Japan.

All but one of 25 economists polled by Reuters are expecting a rate cut. They expect the policy rate to be cut again to 1.75 percent by the fourth quarter and then held steady, although some are predicting rates are headed even lower.

"The market is pricing in 100 percent probability ... of at least one more cut this year after this one (on Thursday), maybe even two more," Marshall Gittler, head of investment research at FXPrimus, said in a note.

"But with the highest interest rates in the G10 and risk aversion calming down – meaning carry trades becoming popular again – they have a lot of cutting to do."

(Editing by Hugh Lawson

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