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CURRENCIES : Pound Trades Around 7-week High Ahead Of BOE Call

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03/22/2018 | 11:48 am

By Sara Sjolin, MarketWatch

Dollar slide continues after dovish Fed

The pound traded close to a seven-week high against the dollar on Thursday, heading up after stronger-than-expected U.K. retail sales and as traders waited for the latest Bank of England announcement.

Meanwhile, the dollar declined, adding to Wednesday's losses that came after dovish signals from the Federal Reserve.

What are currencies doing?

The ICE U.S. Dollar Index fell 0.2% to 89.645, building on a 0.7% loss from Wednesday.

The pound rose to an intraday high of $1.4181, reaching its highest level since early February. With the BOE decision inching closer, sterling trimmed its gain to trade around $1.4142, around the same level as late Wednesday in New York.

The euro fell to $1.2327 from $1.2338 on Wednesday.

The yen rose, with the buck falling to Yen105.62 from Yen106.05 on Wednesday.

What is driving the market?

Sterling had driven to a seven-week high earlier in the session after data showed U.K. retail sales for February rose 0.8%, beating expectations. Pound traders were also waiting for the BOE's rate decision for any hints on where monetary policy is going. The central bank isn't expected to hike rates at this meeting, but could signal tightening is on the cards for either May or June.

The U.K. central bank in November raised rates for the first time in a decade in an effort to calm inflation that had shot up as the pound tanked after the Brexit referendum.

In the U.S., the central bank was also driving currencies. The dollar moved firmly lower on Wednesday after the Fed as expected executed a quarter-point rate hike, but stuck to its previous dovish guidance of three rate increases in total this year.

What are strategists saying?

-- "The markets are currently pricing in a 66% probability for a May hike, which shoots up to 75% in June. Any hawkish slant from the BOE in light of clearing headwinds, thanks to the Brexit transition deal and wages increasing above inflation, could give the pound an extra boost pushing GBP/USD towards $1.4280, a late Jan high," said Fiona Cincotta, senior market analyst at City Index, in a note.

"Traders will be particularly keen to see a voting split other than 9-0, for confirmation that the more hawkish MPC members are already setting their sights on a hike. On the downside, failure by the BoE to fan spring hike optimism could see GBP/USD test $14150 in the near term before looking towards support at $1.4070," she added.

-- "The Fed is relaxed enough about inflation to tighten at a slow and steady pace towards a low terminal rate. That would be extremely risk-friendly for markets globally were it not for concerns about the fiscal/monetary policy mix, the dangers of rising budget and current account deficits and nervousness about U.S. trade policy," said Kit Juckes, chief FX strategist at Société Générale, in a note.

"The result is neutral for the dollar, while US tariff announcements matter more than the Fed. Yesterday overall, was summed-up for me by the dollar falling in reaction to a Fed hike, he added.

What else could drive the market?

Weekly jobless claims are due at 8:30 a.m. Eastern Time, followed by both the manufacturing and services PMI for March from Markit at 9:45 a.m. Eastern. Leading indicators for February are due at 10 a.m. Eastern.

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