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The pound dropped to a seven-month low against the dollar after UK Prime Minister Theresa May lost a vote on her Brexit legislation in the House of Lords.
Sterling fell for the second day versus the greenback as market focus turns to the another vote on Wednesday, this time in the House of Commons. Lawmakers in the un-elected upper house backed an amendment late Monday to ensure a “meaningful vote” for Parliament on any deal with the European Union. The vote in the Commons could further determine the outcome of Brexit talks.
“The lack of ‘sweeping power’ for Brexiteer ministers adds to the uncertainty,” said Andreas Steno Larsen, a global currency strategist at Nordea Bank AB. “The lack of clarity will continue to postpone the eventual sterling comeback. We stay negative toward the pound over the next three months.” The pound declined as much as 0.3 per cent to $1.3200, its lowest level since November. It was little changed against the euro at 87.70 pence. Yields on 10-year gilts fell five basis points to 1.27 per cent. They had earlier touched 1.26 per cent, the lowest level in more than two weeks.
Growing doubts over the prospect of tighter monetary policy also weighed on the British currency. Less than 55 per cent of analysts surveyed by Bloomberg expect the Bank of England to raise interest rates in August, down from 60 per cent in a similar poll in May. Money markets are currently pricing in a 47 per cent chance of a 25-basis-point hike in August, down from 55 per cent at the start of last week.
BoE policy makers will review policy this Thursday and while all 44 analysts surveyed by Bloomberg expect them to leave rates unchanged, the meeting may provide signals on future policy direction.
“As long as the Brexit negotiation is just a risk factor, then Bank of England will instead look for signs of whether the uncertainty spills over to weakness in key figures. But we don’t believe in an August hike,” Nordea’s Larsen said.
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