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
(Changes byline, adds quotes, updates prices)
By Naomi Tajitsu
LONDON, May 14 (Reuters) - The dollar rose broadly on Wednesday, building on gains made after robust U.S. retail data as more investors adopted the view that the Federal Reserve may be done with cutting interest rates, at least for now.
Sterling slumped to a near three-month low against the dollar after the Bank of England in its quarterly inflation report said that UK prices would shoot up this year, which many believe may delay interest rate cuts. Click on [ID:nBOE001421]
Inflation pressures remained a main theme in the market, and investors awaited the April U.S. consumer price index at 1230 GMT to glean more insight into whether the Fed will take a breather from aggressive rate cuts while it gauges the impact of past cuts on the broader economy.
U.S. interest rate futures showed the market has begun to price in the possibility that the Fed may even raise borrowing costs at the end of the year <FEDWATCH>, pushing Treasury yields higher and boosting the appeal of U.S. debt.
"An increase in U.S. bond yields reflects two things: a market perception that the Fed is on hold for now and the feeling that previous rate reductions together with current fiscal stimulus ... will help the U.S. economy," said Neil MacKinnon, chief economist at London-based hedge fund ECU Group.
"Both factors will help support the dollar."
The 10-year Treasury yield jumped near 4 percent, its highest since the start of the year <US10YT=RR>.
The dollar was also bolstered after data on Tuesday showed U.S. retail sales, excluding those in the hard-pressed auto sector, rose 0.5 percent in April, more than double economists' forecasts, and suggesting that consumer demand was improving.
By 1054 GMT, the dollar was up 0.4 percent at 105.18 yen <JPY=>, edging closer to a two-month high of 105.69 yen touched at the start of the month.
The euro fell 0.2 percent to session lows around $1.5425 <EUR=>, with traders citing strong dollar buying versus Asian currencies as a factor dragging the single currency down.
The euro is now down nearly 4 percent from record highs hit last month at $1.6018, according to Reuters data.
Against a basket of six major currencies, the dollar was up 0.2 percent at 73.466 <.DXY>.
Sterling stumbled to $1.9366 <GBP=>, its weakest since late February and approaching its lowest level of the year around $1.9335.
The UK currency was pressured on concerns that ongoing signs that British inflation continues to heat up will have a negative impact on the broader economy, while keeping the central bank wary of cutting rates, which often promotes growth.
BoE Governor Mervyn King on Wednesday said that he likely would soon be forced to write several letters to the government to explain why inflation was more than a point above the central bank's 2 percent target -- as required by the BoE's remit.
The BoE has cut rates by 75 basis points since December, to 5 percent, and some in the market have cast doubt on whether a cut in June will be possible given a surge in consumer prices.
FED TALK
The greenback, which has rallied on speculation the Fed is done with cutting borrowing costs after slashing by 325 basis points since September, also garnered support from Fed comments emphasising inflation concerns.
Cleveland Fed President Sandra Pianalto called inflation "a key risk", while Dallas Fed President Richard Fisher said it was unclear whether a slowing U.S. economy would be enough to alleviate cost pressures. [ID:nN13441127]
"From the comments we've seen from most of the Fed officials, it feels like they want to indicate that we're at or very close to the bottom of where Fed funds need to go," Calyon currency strategist Daragh Maher said.
Economists in a Reuters survey expect a median 0.3 percent gain in the CPI and an annual rise of 2.4 percent in core CPI excluding food and energy items. (Additional reporting by Veronica Brown; editing by Stephen Nisbet) ((naomi.tajitsu@reuters.com; Tel: +44207 542 5830, Reuters Messaging: naomi.tajitsu.reuters.com@reuters.net))
Keywords: MARKETS FOREX
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
(Changes dateline, byline, adds quotes, updates prices)
By Veronica Brown
LONDON, May 14 (Reuters) - The dollar rose broadly on Wednesday, building on gains made after robust U.S. retail data, with attention turning to inflation figures that could heighten chances of a pause in the Federal Reserve's rate cut campaign.
Inflation is the major focus on both sides of the Atlantic, as the Bank of England releases its quarterly inflation report at 0930 GMT before the U.S. consumer price index at 1230 GMT.
The dollar was bolstered after data on Tuesday showed retail sales, excluding the hard-pressed auto sector, rose 0.5 percent in April, more than double economists' forecasts.
The greenback, which has rallied on speculation the Fed is done with cutting borrowing costs after slashing by 325 basis points since September, also garnered support from Fed comments emphasising inflation concerns.
Cleveland Fed President Sandra Pianalto said core inflation measures were rising faster than she liked and called inflation "a key risk".
Dallas Fed President Richard Fisher said it was unclear whether a slowing U.S. economy would be enough to alleviate cost pressures. [ID:nN13441127]
Economists in a Reuters survey expect a median 0.3 percent gain in the CPI and an annual rise of 2.4 percent in core CPI excluding food and energy items.
"From the comments we've seen from most of the Fed officials, it feels like they want to indicate that we're at or very close to the bottom of where Fed funds need to go," Caylon currency strategist Darah Maher said.
"The inflation number today, if it comes in around 2.4 percent then its still above the Fed's comfort zone. So if they are more confident that growth will recover and financial armageddon will be side stepped, well then I guess you have to say real rates based on core are negative and that's already pretty accommodative," he added.
The dollar was up 0.3 percent on the day at 105.15 yen <JPY=>, while the euro fell more than a quarter percent to session lows around 1.5403 <EUR=>, with traders citing strong dollar buying versus Asian currencies as a factor dragging the single currency down.
The euro is now down some 3.7 percent from record highs hit last month at $1.6018, according to Reuters data. Against a basket of six major currencies, the dollar was up 0.3 percent at 73.532 <.DXY>.
UK INFLATION
Currency markets were little moved by Fed Chairman Ben Bernanke's comments on Tuesday that the central bank's liquidity measures had helped relieve strain in financial markets, but that the recovery process remained incomplete.
Sterling was mired at near-three month lows versus the dollar <GBP=> as investors awaited the Bank of England's key quarterly inflation report for any signs price pressures will cap the pace of growth-boosting interest rate cuts.
The BoE is trapped between rising inflation sparked by sky-high food and energy costs and a sharply slowing economy, as evidenced by a recent run of poor economic data.
For sterling the current worry is that not cutting rates fast enough may seriously hamper growth, so a surprisingly big jump in April consumer prices on Tuesday was seen as a negative.
The BoE has cut rates by 75 basis points since December, taking them to 5 percent.
"The central bank will have to be careful before sending an overly hawkish message to the markets. Recent data suggests downside risks to growth in the UK have intensified," UBS strategists said in a note to clients.
Most analysts polled by Reuters predict UK rates will fall to 4.75 percent in June, despite stubbornly high inflation [BOE/INT]. (Reporting by Veronica Brown; Editing by Chris Pizzey) ((RM:veronica.brown.reuters.com@reuters.net; Tel: +44 207 542 6745))
Keywords: MARKETS FOREX
Next: Sterling extends losses vs dlr after UK jobs data