Knife-edge BoE decision this week keeps sterling in check
(Reuters) - The pound held steady against the dollar on Tuesday as investors looked to the Bank of England's (BoE) interest rate decision later in the week and assessed the fallout of spending cuts announced by the new British finance minister
Sterling traded down 0.05% at $1.2854, after having touched a near three-week low of $1.2807 against the dollar in the prior session.
The euro gained 0.17% against the pound to 84.27 pence, with the common currency helped by data showing the euro zone's economy grew slightly more than expected in the three months to June.
Traders are pricing in a near 60% chance that the British central bank will cut interest rates by 25 basis points (bps) to 5.0% on August 1, according to LSEG's interest rate probabilities app, and see rate cuts of 52 bps by the end of the year. [0#BOEWATCH]
With the decision so finely balanced investors are nervous about trading sterling ahead of the decision.
"If we just go back week or two ago, the market was thinking 50:50 chance of a rate cut but economist surveys are more confident that there will be a move this week," said Jane Foley, head of FX strategy at Rabobank in London.
Prices in British shops rose at the joint-slowest rate since October 2021 this month, held down by falls in the cost of non-food items, the British Retail Consortium said.
While headline consumer price inflation targeted by the BoE held at its 2% target in June, the central bank is most concerned about services price inflation, which at 5.7% last month was well above the bank's forecast.
Investors are also awaiting the Bank of Japan and the U.S. Federal Reserve's monetary policy decisions on Wednesday, while U.S. payrolls data could set the tone for financial markets later in the week.
Britain's new finance minister, Rachel Reeves, told parliament on Monday her Conservative predecessor had left public spending on track to go over budget by 21.9 billion pounds ($28 billion) this year.
She announced an immediate 5.5 billion pounds of cuts and pencilled in a further 8.1 billion pounds of cuts for the next financial year, saying the state of the public finances was not sustainable.
"It's not good news. The government has also announced reining back of a lot of infrastructure projects and that's disappointing too in terms of the growth outlook for the UK," added Rabobank's Foley.
(Reporting by Sruthi Shankar in Bengaluru; Editing by Peter Graff)