Pound rises before BoE meets, ignores Conservatives' local election losses

FILE PHOTO: UK pound coins plunge into water in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic/Illustration/File photo

By Samuel Indyk

LONDON (Reuters) – The pound was higher on Monday before the Bank of England’s policy announcement later this week, while markets took local election results in their stride after crushing defeats for the ruling Conservatives.

Sterling was last up almost 0.3% against the dollar at $1.2580, having last week touched $1.2634, its highest level since April 10.

The pound was also up 0.2% at 85.605 pence per euro.

Britain is closed for a holiday on Monday, as was Japan, likely resulting in lower volumes.

The BoE is widely expected to keep its key interest rate unchanged at 5.25% when it announces its policy on Thursday, as it has done since lifting to that level in August last year.

Some analysts, however, see the central bank paving the way for a rate cut as soon as June.

“We expect the MPC (Monetary Policy Committee) to soften its communication, priming the markets for an imminent start to a cutting cycle,” said Danske Bank analyst Kirstine Kundby-Nielsen.

Money markets are not fully pricing a rate cut until the August meeting, with around 50 basis points of easing priced in 2024, implying around two quarter-point cuts.

That is down dramatically from the start of the year when traders had expected borrowing costs to be lowered earlier and as many as five 25 basis point moves in 2024.

The repricing has also been evident in Europe and particularly the U.S., where markets expect the Federal Reserve to keep interest rates higher for longer on the back of sticky inflation and a robust labour market, even with signs of softening.

“With hawkish policy repricing driving markets recently, the pro-cyclical backdrop for the currency is less supportive than it was earlier in the year,” Goldman Sachs analysts say in a note.

“It means that GBP is unfortunately caught in the middle,” they add, cutting their forecast for sterling to trade at $1.24 from $1.30 over a three-month horizon.

Currency traders had largely ignored results from local elections where the opposition Labour Party won mayoral polls in London and central England, dealing a blow to Prime Minister Rishi Sunak before a likely election this year.

“The challenges facing current UK Prime Minister Sunak in the aftermath of local elections are unlikely to excite investors, who seem comfortable in their expectations around the forthcoming general election,” said Paul Donovan, chief economist of UBS Global Wealth Management.

Labour holds a lead over the Conservative Party of around 20 points in most recent opinion polls, putting the opposition party on track to gain a majority in the House of Commons for the first time since 2005.

(Reporting by Samuel Indyk; Editing by Toby Chopra)