Sterling takes a beating; dollar gains ground

By Rae Wee

SINGAPORE (Reuters) – Sterling was struggling to recover from a sharp fall on Thursday following UK inflation data that undershot market expectations, while the dollar regained its footing after a steep decline last week that analysts said was overblown.

In Asia, markets also had their focus on China’s loan prime rate (LPR) decision, where it is expected to keep the lending benchmarks unchanged after the central bank stood pat on a key policy rate earlier this week.

The British pound was last 0.02% lower at $1.2936, after tumbling more than 0.7% on Wednesday in the wake of data that showed Britain’s high rate of inflation falling more than expected in June to its slowest in over a year at 7.9%.

That pulled back market expectations of further aggressive rate hikes from the Bank of England (BoE), with the prospect of UK rates rising above 6% now likely off the table.

Traders had at one point expected interest rates to rise as high as 6.5%.

“The market I think is a bit more reasonable now with its expectations for rate hikes by the BoE. We always thought a 150 (basis) points of hikes was just too much,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (OTC:).

Elsewhere, the euro rose 0.11% to $1.1213, as investors looked to next week’s European Central Bank (ECB) policy meeting for further clarity on the rate outlook.

ECB policymakers have in recent days taken a more dovish tone, with Governing Council member Yannis Stournaras the latest to guide that future rate rises past July’s likely 25 bp increase remains up in the air.

The steadied above 100 and last stood at 100.18, regaining some lost ground after last week’s more than 2% fall in a knee-jerk reaction to U.S. inflation data that came in cooler than expected.

“We thought (the fall) was too strong, so it looks like the dollar has regained some of those losses,” said Capurso. “And with the global economic outlook deteriorating … that’s (going to be) very supportive for the safe haven U.S. dollar.”

The Japanese yen rose 0.1% to 139.56 per dollar, while the Australian dollar was last 0.16% higher at $0.6782, ahead of the country’s employment data later on Thursday.

The gained 0.06% to $0.6267, though retreated from the previous session’s high of $0.6315 hit after New Zealand’s consumer inflation came in slightly above expectations in the second quarter.

Ahead of the LPR decision in China, the rose roughly 0.2% to 7.2184.

Investors continue to be on the lookout for further support measures from Chinese authorities to shore up the country’s faltering post-COVID recovery, with data on Monday showing the economy grew at a feeble pace in the second quarter as demand weakened at home and abroad.

“China’s growth has disappointed in the second quarter, but it’s very much on top of the agenda there (that) some stimulus will come,” said Mel Siew, a portfolio manager at Muzinich & Co.

“It may not come as impactfully as people would like, but I think what will happen is you’ll see growth gradually resuming in China in the second half.”

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