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BoE interest rate dilemma keeps sterling under pressure

·2-min read
FILE PHOTO: British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna

By Joice Alves

LONDON (Reuters) -The pound edged lower on Tuesday, hovering around a three-week low, pressured by uncertainty about whether the Bank of England will raise interest rates this week.

Sterling rose to a 20-month high versus the euro in late October amid expectations for a BoE interest rate hike as inflation risks surged. But growing doubts around what the central bank will actually do at its policy meeting on Thursday is keeping investors on their toes this week.

BoE Governor Andrew Bailey has talked of the need to act to contain inflation expectations, with two of the other nine Monetary Policy Committee members voicing similar concerns.

Meanwhile, two MPC members say there is little they can do to fix the root cause of accelerating prices: bottlenecks caused by the reopening of the world economy which might fade quickly.

Jeremy Stretch, head of G10 FX strategy at CIBC, said "sterling looks set to remain on the defensive" while the market awaited for business data and a decision from BoE.

"Ahead of UK final services PMI tomorrow and the BoE decision on Thursday, analysts remain split between no change and a 15bp hike," said Stretch. "We narrowly favour the former."

Sterling slid 0.4% versus the dollar to $1.3614 at 15.10 GMT GMT, hitting a three-week low.

Versus the euro, it fell 0.1% to its lowest level in three weeks at 85.07 pence.

Adding to growth worries are a post-Brexit spat with the European Union over Northern Ireland trading arrangements and a fishing row with France.

Britain wants to find a consensual solution together with France to resolve the fishing dispute, a spokesman for Prime Minister Boris Johnson said, after French President Emmanuel Macron postponed slapping trade sanctions on Britain over the fishing row.

A spokesman for the UK environment ministry told Reuters, that a British fishing vessel seized in France remained in the port of Le Havre, and confirmed that minister George Eustice had misspoken earlier when he said it had been released.

(Editing by Alison Williams, William Maclean)

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