LONDON, May 15 (Reuters) - Sterling slipped on Thursday, staying trapped near three-month lows hit the previous day against the dollar as the currency was pressured by the prospect that higher UK inflation risks would strangle economic growth.
The Bank of England's quarterly inflation report made bearish reading on Wednesday, highlighting the tangle faced by policymakers trying to balance rising inflationary pressures from sky-high commodity prices and economic damage from the ongoing global credit crunch.
The report hacked away at expectations for UK interest rates to be cut in June from the current 5 percent, and left the pound severely pressured as investors worried about future damage to the economy from the inflation versus slowing growth conflict.
UK Prime Minister Gordon Brown weighed into the rate debate earlier, saying he hoped that the BoE would be able to cut rates further. This had intially boosted sterling, but ultimately did little to quell investors' concerns about the toxic coupling of high inflation and low growth.
"(Higher prices) leaves the BoE very little room to move on monetary easing, and in that respect, it's possible for economic growth to slow quite sharply going foreward," said Lee Hardman, currency economist at BTM UFJ.
"The market has come to the view that higher inflation is contributing to further exacerbating the downside risks in economic growth," he said adding that this problem would keep sterling weak.
By 1406 GMT, sterling was down 0.15 percent at $1.9433, having hit a three-month low on Wednesday at $1.9363 <GBP=>. The euro rose 0.2 percent to 79.62 pence <EURGBP=>.
BoE Governor Mervyn King said on Wednesday the fall in sterling will support the rebalancing of the economy, while the inflation report itself attributed some of the weakness in the currency in recent months to "a reassessment by investors of the sustainable value of sterling or an increase in the risk premium required for holding sterling assets".
A poll carried out after the BoE report showed it would hold off from growth-boosting rate cuts until the third quarter as it battles soaring inflation [BOE/INT]. (Reporting by Naomi Tajitsu and Veronica Brown; Editing by David Christian-Edwards) ((RM:veronica.brown.reuters.com@reuters.net; Tel: +44 207 542 6745))
Keywords: MARKETS STERLING CLOSE
LONDON, May 15 (Reuters) - Sterling was trapped on Thursday near three-month lows hit the previous day against the dollar, strangled by the prospect of inflation staying higher for some time to come while economic growth slows.
The Bank of England's quarterly inflation report made bearish reading on Wednesday, highlighting the tangle faced by policymakers trying to balance rising inflationary pressures from sky-high commodity prices against economic damage from the ongoing global credit crunch.
The report hacked away at expectations for UK interest rates to be cut in June from the current 5 percent, leaving the pound severely pressured as investors worried about future damage to the economy from the inflation versus slowing growth conflict.
UK Prime Minister Gordon Brown weighed into the rate debate earlier, saying he hoped that the BoE would be able to cut rates further, but after lifting the pound briefly his comments were discounted.
"The inflation report dominates, as it was pretty damning. It expected growth to have a downside risk and inflation to have an upside risk," said Naeem Wahid, currency strategist at Bank of Scotland Treasury Services.
By 0841 GMT, sterling was flat on the day at $1.9455, having hit a three-month low on Wednesday at $1.9363 <GBP=>. The euro rose 0.3 percent to 79.74 pence <EURGBP=>.
BoE Governor Mervyn King said on Wednesday the fall in sterling will support the rebalancing of the economy, while the inflation report itself attributed some of the weakness in the currency in recent months to "a reassessment by investors of the sustainable value of sterling or an increase in the risk premium required for holding sterling assets".
A poll carried out after the BoE report showed it would hold off from growth-boosting rate cuts until the third quarter as it battles soaring inflation [BOE/INT].
(Reporting by Veronica Brown; Editing by Ruth Pitchford)
((RM:veronica.brown.reuters.com@reuters.net; Tel: +44 207 542 6745))
Keywords: MARKETS STERLING OPEN
LONDON, May 14 (Reuters) - Sterling hit a three-month low versus the dollar on Wednesday after the Bank of England's quarterly report showed inflation staying above target for some time to come and economic growth slowing sharply.
The dilemma facing the Bank was illustrated by a UK jobs report earlier in the session, which showed the number of people claiming unemployment benefit rose for the third month running while average earnings growth posted a surprise jump.
Analysts say the two conflicting forces could limit the scope for future interest rate cuts, potentially further hurting the economy and thus sterling.
"What was a surprise in the last few days, is that inflation is worse than expected. And that, as a feedback, is negative for growth. That's what the Bank of England were highlighting," said Peter Frank, currency strategist at Societe Generale.
Sterling fell as low as $1.9366 <GBP=> after the report, its weakest since Feb. 20.
It trimmed losses later, piggy-backing on a broad dollar sell-off after news of an unexpected fall in U.S. inflation, to trade at $1.9425 by 1402 GMT.
The euro was at 79.50 pence <EURGBP=>, up 0.1 percent on the day and over eight percent higher since the start of the year.
BoE Governor Mervyn King said the fall in sterling will support the rebalancing of the economy, while the inflation report itself attributed some of the weakness in the currency in recent months to "a reassessment by investors of the sustainable value of sterling or an increase in the risk premium required for holding sterling assets".
"In my opinion, this is a repeat of the Governor's invitation to sell pounds back in November," Nick Parsons, head of markets strategy at nabCapital, said in a note to clients.
For more on the inflation report see [ID:nBOE001421]. (Reporting by Toni Vorobyova; editing by Stephen Nisbet) ((antonina.vorobyova@reuters.com; Tel: +44207 542 7958, Reuters Messaging: antonina.vorobyova.reuters.com@reuters.net))
Keywords: MARKETS STERLING/CLOSE
By Toni Vorobyova
LONDON, May 14 (Reuters) - Sterling hit a three-month low versus the dollar on Wednesday after the Bank of England's quarterly report showed inflation staying above target for some time to come and economic growth slowing sharply.
The dilemma facing the Bank was illustrated by UK jobs report earlier in the session, where the number of people claiming unemployment benefit rose for the third month running while average earnings growth posted a surprise jump.
Analysts say the two conflicting forces could limit the scope for future interest rate cuts, potentially further hurting the economy and thus sterling.
"Overall the report makes very bearish reading really as far as sterling is concerned with the higher inflation and the weak growth picture as well," said Ian Stannard, senior FX strategist at BNP Paribas.
Sterling fell as low as $1.9366 <GBP=> after the minutes, its weakest since Feb. 20. A move below $1.9335 would take it beyond this year's lows, to levels not seen since March 2007.
By 1030 GMT, the euro was at 79.55 pence <EURGBP=>, up 0.1 percent on the day and over eight percent higher since the start of the year.
BoE governor Mervyn King said the fall in sterling will support the rebalancing of the economy, while the inflation report itself attributed some of the weakness in the currency in recent months to "a reassessment by investors of the sustainable value of sterling or an increase in the risk premium required for holding sterling assets".
"In my opinion, this is a repeat of the Governor's invitation to sell pounds back in November," Nick Parsons, head of markets strategy at nabCapital, said in a note to clients.
For more on the inflation report see [ID:nBOE001421].
(Reporting by Toni Vorobyova; editing by David Christian-Edwards)
((antonina.vorobyova@reuters.com; Tel: +44207 542 7958, Reuters Messaging: antonina.vorobyova.reuters.com@reuters.net))
Keywords: MARKETS STERLING/MIDSESSION
LONDON, May 14 (Reuters) - Sterling hit a three month low versus the dollar, while UK stocks fell and gilts pared losses on Wednesday after the Bank of England's quarterly report showed inflation staying above target and growth slowing sharply.
Analysts say rising price pressures will limit the scope for growth-boosting interest rate cuts in coming months, potentially causing further problems for the economy.
"Overall the report makes very bearish reading really as far as sterling is concerned with the higher inflation and the weak growth picture as well," said Ian Stannard, senior FX strategist at BNP Paribas.
Sterling fell as low as $1.9366 <GBP=>, down around half a cent from levels seen before the inflation report.
At 0935 GMT, Britain's FTSE 100 <.FTSE> extended earlier losses, down 10.3 points, or 0.2 percent at 6,201.6.
The June long gilt future <FLGc1> pared losses, with the contract at 107/63, compared with 107.54 earlier. The June short sterling contract also pared losses, to stand at 94.220, down 2 ticks on the day. Before the BoE, it was at 94.215 <FSSM8>.
Earlier in the session, short sterling hit 94.200 - its lowest level since Oct. 21.
For more on the inflation report see [ID:nBOE001414].
(Reporting by London Markets Team)
((antonina.vorobyova@reuters.com; Tel: +44207 542 7958, Reuters Messaging: antonina.vorobyova.reuters.com@reuters.net))
Keywords: MARKETS BOE
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