Sterling loses steam as traders turn to safe-haven currencies

·2-min read
File photo illustration of a two Euro coin pictured next to a one Pound coin on top of a portrait of Britain's Queen Elizabeth

(Reuters) -The British pound weakened against the dollar on Tuesday as traders turned to safe-haven currencies amid rising U.S.-China tensions over Taiwan, with the market also looking ahead to a Bank of England (BoE) policy meeting this week.

The pound was down down 0.46% against the dollar at $1.2193 pence at 1421 GMT.

Against the euro, the pound reversed course from earlier trading and was up 0.16% at 83.580 pence.

The BoE will announce its decision on Thursday, with investors now pricing in an 95% chance of a 50 basis point (bp) hike, a bigger increase than the previous four hikes as the central bank strives to contain soaring inflation without exacerbating an economic slowdown.

"Short term, if the BoE opts for a 25bps hike on Thursday I think sterling will lose ground. The market is expecting at least a 50bps hike and Bailey has kind of suggested this will indeed be delivered," said Stuart Cole, head macro economist at Equiti Capital.

Mortgage lender Nationwide on Tuesday said British house prices rose in July at the slowest monthly pace in a year and the market is likely to slow further as the cost-of-living squeeze tightens and the BoE keeps on raising interest rates.

"Given the heightened downside risks to UK growth, notably rising inflation and the energy crisis in Europe, we expect a downward revision to the 2022 GDP forecast from May," said Matthew Ryan, head of market strategy at global financial services firm Ebury, in a note.

"Depending on the size of this likely downgrade, this could trigger a bit of weakness in the pound."

As with most currencies, sterling has lately struggled against a strong U.S dollar, with risk averse investors favouring U.S assets.

The pound is down about 10% verus the dollar so far in 2022.

(Reporting by Lucy RaitanoEditing by Angus MacSwan and Mark Potter)

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