Sterling falls as investors expect a more dovish BoE

Sterling fell against its major rivals on Monday on expectations the Bank of England will take a more circumspect stance towards monetary policy at this week’s meeting.

The pound shed 0.4% to $1.3693 against the dollar as investors took the view that recent weaker-than-expected retail sales data will prompt a more dovish outlook from the Bank’s Monetary Policy Committee (MPC), despite rising inflation.

“We doubt the MPC will sound hawkish enough this week to validate the recent sharp uprating of markets’ expectations for the near-term path of the bank rate,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Indeed, the pound began to come under pressure last week after a mixed bag of economic reports.

Data conundrum

On Tuesday, labour market data showed a record high of more than a million job vacancies and an 8.3% increase in wage growth.

While this appeared to underpin Wednesday’s rise in the annual inflation rate to 3.2%, subsequent consumer data for August published on Friday were disappointing, with headline retail sales falling 0.9% after a 1.8% gain in July.

“Recent downside news on economic activity will counterbalance the upside news on inflation,” added Tombs.

While the MPC has continued to assert the rise in inflation is due to temporary factors, the labour market data is likely to cause the biggest puzzle when the committee meets on Thursday.