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Sterling slips from recent highs as rate hike rally steadies

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By Reuters
Sterling steady as rate hike expectations grow
Sterling steady as rate hike expectations grow   -   Copyright  Thomson Reuters 2021

LONDON -The pound slid against the euro and edged down slightly against the dollar on Thursday as traders assessed whether recent gains linked to expectations of a central bank rate hike have gone too far.

Sterling had earlier in the day hit a one-week high against the greenback as inflation and encouraging economic data fuelled speculation the Bank of England (BoE) will act first among major global policymakers to raise rates for the first time since the COVID-19 pandemic struck early last year.

Those expectations were further bolstered by data on Tuesday showing Britain’s job market had weathered the end of the government’s furlough support scheme, easing a major worry about the risks of tightening monetary policy.

Investors remain wary about the timing of any move, however, after the BoE surprised markets earlier this month by keeping rates steady when many had understood the hike was coming.

At 1527 GMT sterling had slipped 0.41% versus the euro, against which it had hit a 21-month high on Wednesday after rising 2.4% in the last two weeks. It is now at 84.23 pence.

The pound was also down 0.1% against the dollar at $1.3481.

While rate hike expectations support the pound for now, analysts at Citi said on Thursday there are longer term concerns for the currency amid wrangling between the European Union and Britain over the Northern Ireland part of the Brexit deal.

Relations between Brussels and London have soured in recent weeks after Britain, unhappy with the deal it signed up to in 2020, threatened to trigger an emergency clause known as Article 16, potentially leading to a trade war.

Such action could send sterling as low as $1.25, the Citi analysts warned, if the EU imposed tariffs in response.