Sterling subdued as soft data pushes back BoE rate hike chances

LONDON, Oct (HKSE: 3366-OL.HK - news) 6 (Reuters) - Sterling slipped against the euro on Tuesday, weighed down by soft economic data that have pushed back market expectations of monetary tightening by the Bank of England towards the end of next year.

A much weaker-than-expected reading of the services sector purchasing managers' index (PMI) on Monday saw analysts cut forecasts for UK growth for the third quarter. And data released on Tuesday showed UK house prices fall in September, highlighting subdued consumer demand.

The euro was up 0.2 percent at 74.06 pence, while sterling was broadly steady against the dollar at $1.5155 , not far from a five-month low of $1.5107 struck last Thursday.

"If the weakness in the economy continues -- which given the external challenges from abroad is more likely -- the Bank of England will struggle to justify the case being made for a rate hike in the near future," said Andy Scott, economist at HiFX.

The BoE's monetary policy committee meets later this week and while it is widely expected to keep rates at record lows, policymaker Ian McCafferty could be the sole member who is likely to vote for a rate hike.

Others in the nine-member committee are set to vote for no change in rates. Rate hike chances in Britain took a knock after Friday's U.S (Other OTC: UBGXF - news) . non-farm payrolls shocked markets out of any expectations the Federal Reserve will hike rates this year.

Investors have been expecting the BoE (Shenzhen: 200725.SZ - news) to follow the Fed in raising interest rates, given a pick up in wages and an improving labour market in Britain. Both the dollar and the pound have gained over the past year from expectations that policy will be tightened while those in Japan and Europe are held at rock bottom.

But that view is now being challenged, prompting investors to cut bullish positions in the pound.

"The soft economic data from the UK have acted as factors which have resulted in expectations for an interest rate hike by the BoE being pushed back, contributing to pressure on the pound," said Lukman Otunuga, analyst at FXTM.

"Technically sterling/dollar remains bearish on the daily timeframe, with many seeing the $1.5100 level as a probable bottom." (Editing by Catherine Evans)