LONDON (Reuters) – Sterling’s rally faltered on Thursday despite the Bank of England striking a less dovish tone than other central banks, as policymakers slashed their second-quarter growth forecasts and flagged risks from trade tensions and a no-deal Brexit.
BoE policymakers, as expected, voted unanimously to keep interest rates on hold at 0.75%. They stuck to their message that rates would need to rise in a limited and gradual fashion, so long as Britain avoids a damaging no-deal exit from the European Union.
The BoE message was far less dovish than the U.S. Federal Reserve and European Central Bank, which this week opened the door to rate cuts and more stimulus to counter any economic slowdown and rising trade tensions.
But policymakers did note a darkening global outlook and said Britain’s economy was now on track to stagnate in the second quarter, rather than grow 0.2% quarter-on-quarter as it had forecast last month.
The pound didn’t budge after Brexit campaigner Boris Johnson scored by far the higher number of votes in the latest round of the Conservative party leadership contest, in which the number of candidates vying to become party leader and replace Theresa May as prime minister was whittled down to three.
Another vote later on Thursday will reduce the field to two candidates, with results due around 1700 GMT. Grassroots party members will then decide the winner by the end of July.
Graphic: World FX rates in 2019 – tmsnrt.rs/2egbfVh
The pound, trading around $1.2720 before the BoE announcement, fell to around $1.27, still leaving it up 0.4% on the day.
Sterling has rallied in recent days, pulling away from five-month lows, as investors dumped the dollar following the Fed’s dovish signalling.
Graphic: British pound vs U.S. dollar – tmsnrt.rs/31McaBy
Against the euro, the British currency extended its losses and was down as much as 0.5% at 89.22 pence, before steadying at 88.91 pence by 1500 GMT.
“On the whole the message is following the theme set by the bank’s peers in recent days by turning more dovish,” said David Cheetham, an analyst at online broker XTB.
Cheetham added that while the BoE had stopped short of delivering as strong a signal as other central banks, “it does seem increasingly likely that the next move will be an interest rate cut rather than a hike.”
Britain’s FTSE 100 extended gains to hit a day’s high, and was last up 0.5%. The exporter-heavy stock index tends to rise when sterling falls.
British government bond prices rallied, with September gilt futures jumping and benchmark 10-year gilt yields falling.
“I’ve seen nothing in what the BoE has been saying and doing that indicates any willingness to buck the trend from other central banks,” Kevin Gardiner, global investment strategist at Rothschild & Co, said before the BoE announcement.
“Unemployment is lowest since (19)74, inflation is at (the BoE’s) target, but they’re unlikely to stick out from the central banking crowd right now.”
Markets are not pricing for a BoE hike any time before August 2020.
Earlier, data showed British retail sales falling in May 0.5% month-on-month, in line with forecasts.
The UK economy has shown signs of weakness in the face of prolonged uncertainty over Brexit but economic data have moved the pound only marginally as traders focus on Britain’s postponed departure from the EU, now set to happen on Oct. 31.
Graphic: Trade-weighted sterling since Brexit vote – tmsnrt.rs/2hwV9Hv
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