Sterling struggles ahead of inflation data and BoE meeting

By Farouq Suleiman

LONDON (Reuters) – The pound traded lower against the dollar and the euro on Tuesday, as money market traders awaited pivotal inflation data due on Wednesday, ahead of the Bank of England’s monetary policy meeting this week.

At 9000 GMT, the pound was $1.277, down 0.14% against the dollar, while the euro rose 0.2% to 85.59 pence.

On Wednesday, official data for inflation in May will be published.

Last month, Britain reported consumer prices eased to 8.7% in annual terms in April, down from 10.1% in March, with food and non-alcoholic drink price inflation in double digits at 19.1% in April from 19.2% the month before.

The latest industry data from market researcher Kantar on Tuesday showed grocery inflation in Britain eased slightly for the third month in a row in June, but was still well into double digits.

The outcome of the latest inflation figures could be a huge factor for the BoE’s Monetary Policy Committee on Thursday.

The market sees a 73% chance that the BoE will hike interest rates by 25 basis-points (bps) and a 27% chance of 50 bps to 5%, up from the previous day.

Two-year government bond yields remained above 5% on Tuesday, after slightly moving above Monday’s 5.085% peak for the first time since the 2008 financial crisis.

Adding to the expectation, 64 economists in a Reuters poll last week said they saw the BoE adding another 25 bps to the interest rate, with a majority forecasting the bank rate to peak at 5.00% by the end of August.

“Hedge funds and asset managers are positioned for the pound to outperform the dollar, but we think these positions could be vulnerable, as too much positivity may be priced into the pound,” Macrohive analyst Bilal Hafeez said in a note.

Across the Channel, euro zone policymakers grappled with how the European Central Bank should continue to tackle inflation.

Last week, ECB President Christine Lagarde said it was likely the bank would raise interest rates again in July.

While some are dovish, the ECB’s hawkish policymakers have said inflation could prove to be higher than expected.

Board member Isabel Schnabel said the ECB needed to “err on the side of doing too much rather than too little,” just days after the central bank raised rates to highest level in 22 years.

Nonetheless, UK 10-year gilt yields traded at a premium of 197 bps over German 10-year Bunds, just shy of October’s 31-year highs – indicating how much more yield investors are demanding to hold British debt rather than euro zone benchmark bonds.

(Reporting by Farouq Suleiman; editing by Barbara Lewis)