The British pound edged lower against major currencies on Wednesday as investors contemplated whether the currency will be negatively impacted by several expected interest rate hikes by the Bank of England (BoE). The rate increases could put further strain on the economy.
The pound slipped 0.02% against the dollar to $1.2713 as of 0840 GMT. It has declined 1.2% from the 14-month high it reached against the dollar last month.
Versus the euro, the pound weakened 0.14% to 85.60 pence, pulling back from a 10-month peak against the single currency last month.
The BoE raised interest rates by half a percentage point in June to 5% and markets forecast a similar hike when the central bank meets on August 3.
“Sterling is again diverging from UK rate expectations, signaling that markets are questioning the credibility of UK policy,” said Adam Cole, head of currency strategy at RBC Europe.
“Although we have serious medium-term concerns about imbalances and policy credibility in the UK, this is hard to trade tactically, especially in thin summer markets, so we will remain neutral on the pound in the short term,” he added.
Money markets are pricing in BoE rates peaking in March 2024 at 6.28%, compared with expectations a month ago of a maximum of about 5.3% by year-end and cuts shortly thereafter.
The BoE is closely monitoring economic data as it considers further rate increases needed to curb inflation.
Growth in Britain's private sector slowed sharply last month despite lower inflation, as higher BoE rates weighed on demand, a survey showed Wednesday.
Another survey Monday showed the decline in Britain's manufacturing sector deepened in June and optimism faded despite easing price pressures.
The S&P Global/CIPS UK Manufacturing Purchasing Managers' Index fell to 46.5 in June from 47.1 in May, its lowest reading this year and one of the weakest since the 2008-2009 financial crisis.
