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Sterling falls below $1.36 as BoE tries to cool rate-hike bets

By Reuters

By Joice Alves

LONDON -Sterling edged down versus the dollar and euro on Wednesday after Bank of England Governor Andrew Bailey told parliament that there were clear inflation risks but that markets should not get carried away over the likely scale of interest rate hikes.

Speaking about the BoE’s decision earlier this month to raise interest rates, Bailey said he saw a clear risk of inflation sticking at high levels, adding that second-round effects are a concern, which could require more hikes.

But he urged investors not to get carried away with bets on future interest rate hikes.

Sterling barely moved after speeches from the BoE Governor and three other members of the central bank. But it fell below the $1.36 mark later in the day.

Versus the dollar, it edged 0.1% lower to $1.3573 at 1510 GMT, after touching a six-day low the previous day.

It was also fell 0.1% against the euro to 83.47 pence after recording its worst day against the single currency in one week on Tuesday, when it fell at one point to 83.82.

“Sterling has traded sideways through today’s BoE testimony to the Treasury Committee,” said Simon Harvey, head of FX analysis at Monex Europe.

“BoE communications since February’s meeting have largely taken aim at cooling market-implied policy rates,” he said.

The BoE raised interest rates to 0.5% this month from 0.25%, in a split decision with some members voting for a 0.50% increase to 0.75%.

Jonathan Haskel, a member of the monetary policy committee, part of a minority who voted for a bigger increase, told parliament his decision was “finely balanced”.

On Tuesday, Deputy Governor Dave Ramsden, who also voted for a bigger increase, said he now saw a “modest” rate hike over the coming months.

Investors are fully pricing in another 0.25% rate hike at the BoE’s next scheduled meeting on March 17.

Jeremy Stretch, head of G10 FX strategy at CIBC, said the scale of tightening priced by year-end, currently almost 144 basis points, is “too aggressive”.

Traders also said sterling got some support from improved risk sentiment, which pushed the pan European STOXX 600 index up 0.7%, after falling to a seven-month low on Tuesday, as investors took stock of Western sanctions against Moscow for ordering troops into separatist regions of eastern Ukraine.