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LONDON: Sterling fell against the dollar and euro on Friday, retreating from the previous session’s one-month highs, as investors braced for Britain’s beginning the formal process of leaving the EU next week.
An interview with Bank of England (BoE) policymaker Gertjan Vlieghe in The Times also laid out the argument for the BoE looking through further rises in inflation over the next few months in aid of supporting the economy.
Strong inflation and retail sales data have added to expectations the BoE might lean toward supporting sterling with higher interest rates over the next year, pushing the pound 1 percent higher against the dollar this week.
But investors worry that Prime Minister Theresa May’s invoking Article 50 next Wednesday may trigger a period of political jousting with its EU partners that will lay bare the scale of the risks to the economy from 18 months of talks.
Sterling dipped 0.3 percent to $1.2484 in morning trade in London and was 0.4 percent lower at 86.47 pence per euro.
“Uncertainty (surrounding Brexit) remains intact,” said Credit Agricole currency strategist Manuel Oliveri.
“Rate expectations are unlikely to rise because the BoE is linking its monetary policy stance to this uncertainty, and that is why we do not believe sterling has more upside from current levels.”
Since minutes from the BoE’s meeting last week showed a number of monetary committee members close to voting for a rise in rates, signals from official have been mixed.
Asked about Tuesday’s inflation data, BoE Gov. Mark Carney said it was important not to overreact to a single data point.
Deputy Gov. Ben Broadbent on Thursday said it was possible interest rates would rise, but also highlighted a strong sense of caution among investors about the outlook for Britain after Brexit.
Policymaker Gertjan Vlieghe believes a rise in inflation to more than 3 percent might not prompt him to consider raising interest rates because the increase would probably be temporary, The Times newspaper reported on Friday.