The pound erased its losses against the dollar after U.S. factory production unexpectedly declined in May, damping speculation that the Federal Reserve will give a more hawkish outlook on interest rates this week.
Sterling strengthened versus the euro, as collapsed talks between Greece and its creditors lent support to the pound. Investors have been forecasting the Federal Open Market Committee may hint at a tightening of policy when it announces its interest-rate decision on Wednesday, with the move targeted months before the Bank of England is seen raising rates.
“The U.S. data have been indeed disappointing today, which is contributing to the dollar weakness,” said Anezka Christovova, a foreign-exchange strategist at Credit Suisse Group AG in London. “Yet in general, ranges are tight today, markets are cautious to trade much ahead of the heavy events and data calendar later this week like the FOMC, U.K. data and Greece.”
Sterling was little changed at $1.5568 at 5:03 p.m. London time after climbing last week for the first time since the period ended May 15. The pound strengthened 0.1 percent to 72.32 pence per euro.
Investors are only fully pricing a quarter-point rate increase by the U.K. central bank, from the current 0.5 percent, by August 2016, according to Sonia fixings data provided by ICAP Plc. That assumes the current four basis-point spread for Sonia fixings below the official bank rate would return to zero once the central bank raises borrowing costs. Fed officials will tighten policy in about six months, according to a Morgan Stanley index.
The euro slipped after Greece’s latest aid talks with creditors fell apart.
“Whilst inflation remains in the ‘danger zone’ around zero, we see no incentive for the London-based central bank to change its relatively dovish tone,” Bank of America Merrill Lynch strategists, including Sebastien Cross in London, wrote in a note to clients. “We maintain our view that the BOE, facing the current tide of global easing, will be unwilling to move before the Federal Reserve.”
The U.K. central bank releases the minutes of its June meeting on Wednesday. Data set for release on Tuesday will show a slight pickup in inflation in May, to 0.1 percent on a year-on-year basis, according to a Bloomberg survey of analysts. That would be up from the minus 0.1 percent reading in April, which was the first negative print since records began in 1960. Slow inflation may push back forecasts for the BOE to tighten policy and weigh on sterling.
Benchmark 10-year U.K. government-bond yields rose four basis points, or 0.04 percentage point, to 2.02 percent. The 5 percent security due in March 2025 fell 0.36, or 3.60 pounds per 1,000-pound face amount, to 126.16.
Sterling could appreciate against the euro as increasing concern that Greece is dangerously close to defaulting on its debt and possibly exiting the euro may prompt some investors to seek refuge in the pound’s relative safety, Credit Agricole’s Myers said.
“Many customers are looking for enough liquidity but still wanting to protect themselves against the situation in Europe” and are opting for sterling, Myers said. “On any negative Greek result, euro-sterling should spike lower.”