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Pound holds gain, investors await BoE rate decision

London - The pound was little changed against the dollar one day after its biggest jump since October as investors await Bank of England’s latest interest-rate decision and economic forecasts.

With all 41 analysts in a Bloomberg survey predicting the BOE will hold its official rate at a record-low 0.5%, investors’ focus is on the economic projections in the central bank’s quarterly Inflation Report for any hints on the bank’s assessment of the UK’s rate path.

After a rout in global equities and commodities in January, forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a quarter-point increase to the official bank rate until after March 2017. At the turn of the year an increase in November 2016 was priced in.

“We don’t think the BoE is going to say anything to suggest they are inclined to be easing, and that the next move is still likely up,” said Richard Kelly, London-based global head of market strategy at Toronto Dominion Bank. “But nor do I expect them to suggest they are rushing to hike any time soon. Some of the extreme pricing in the market is probably going to recede slightly.”

Sterling has dropped more than 5% since the day before the BoE’s November inflation report, touching the lowest level since 2009 last month.

Even so, the UK currency has rallied since then and climbed the most in almost four months on Wednesday, as signs of a slowing US economy helped derail bets on diverging policies between global central banks.

The pound was at $1.4611 as of 10:39, after climbing 1.3% on Wednesday. It dropped to $1.4080 on January 21, the lowest since 2009. Sterling was little changed at 76.07 pence per euro.

BoE minutes

The BoE will release minutes of its meeting alongside the decision, which will show how the nine-member Monetary Policy Committee voted. Last month, there was speculation that Ian McCafferty - who’s been voting for a 25 basis-point increase since August - would reverse his call. He stuck to his position and cited a drop in the pound as an upside risk for consumer prices.

Investors have become less bearish about the pound. The premium for three-month options to sell the pound against the dollar versus those allowing for purchases has dropped to 0.85 percentage point, compared with 1.20 percentage points at the start of the year, 25-delta risk reversals show.

UK government bonds declined for the first time in three days, pushing 10-year gilt yields up four basis points to 1.57%. The 2% security due in September 2025 fell 0.355, or 3.55 pounds per 1 000-pound face amount, to 103.80. The yield dropped nine basis points in the previous two days. 

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