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Sterling stays near 4-month lows versus euro as dovish BoE signal weighs - REUTERS

FEBRUARY 04, 2023

Feb 3 (Reuters) - Sterling stayed close to its weakest level in four months against the euro on Friday, following a relatively dovish stance from the Bank of England the day before.

The BoE on Thursday delivered its 10th straight interest rate hike, raising the key interest rate by 50 basis points to 4% - its highest since 2008.

However, comments from Governor Andrew Bailey that inflation may have "turned a corner" signalled that Britain's central bank may be close to bringing its tightening cycle to an end.

"More hikes from the BoE require persistently elevated inflation surprises, not just persistently elevated levels of inflation," said Jamie Fahy, head of global macro strategist at Citi.

"The BoE's terminal rate priced into the market was well above 4%. Rates have a moment to play and when you take out some of that rate pricing, the currency will come under pressure."

Sterling was trading largely unchanged from Thursday's close against the euro, last at 89.22 pence, after hitting its weakest since September at 89.55 pence following the BOE's decision.

Against the dollar, the pound strengthened 0.2% to $1.2253, recovering from an over three-week low hit earlier in the session.

On the week, the British currency is set to weaken about 1.2% against greenback, while the euro-sterling pair is seen strengthening about 1.7% - the sharpest weekly gain for the euro in three months.

The BoE's signal was seen as more dovish relative to the European Central Bank and the U.S. Federal Reserve, which delivered 50 bp and 25 bp increases respectively this week. ECB policymakers on Friday said there were more hikes to come in the euro zone because inflation was still far too high.

While investors debate if the BoE will opt for another quarter basis point move next month, Citigroup's economic team expects the central bank to pause, and see them delivering their first rate cut, by 25 bps, in November.

Along with the weak outlook for the UK economy relative to the euro zone, Citi forecasts the euro-sterling pair strengthening to 91 in the next six to 12 months, suggesting a near 2% weakening for sterling from current levels.

(Reporting by Susan Mathew; Editing by Toby Chopra)


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