Sterling holds breath before historic BoE decision

LONDON - 2 November 2017: Sterling steadied on Thursday, consolidating some chunky gains this week, especially against the euro, before a historic Bank of England policy decision where it is widely expected to raise interest rates for the first time in nearly a decade.

With a rate hike virtually baked into the market, analysts would be keenly watching whether BoE Governor Mark Carney would signal more rate hikes in the coming months, an outcome that could push the British pound sharply higher or revert to a more cautious stance.

The Bank's decision is expected to be announced during BoE Governor Mark Carney's address at 1230 GMT and it will be preceded by the results of a monthly survey of the British construction sector, expected at 0930 GMT, which could give some indication of the economic mood and the likelihood of a longer-term tightening cycle.

With a mixed economic picture and the continued weight of political uncertainty about the progress of Brexit talks, many analysts are expecting a dovish, one-and-done hike from the Bank.

"You can probably find your favourite 2,000 economists, strategists, and fools, set them all up and they'll tell you there's a dovish hike coming," said Kit Juckes, head of foreign exchange strategy at Société Générale.

The latest Reuters poll strongly supported the view that the BoE will raise base rates to the 0.5 percent they stood at from March 2009 until August last year, when they were halved to 0.25 percent after Britons voted to leave the European Union.

Sterling was up 0.1 percent against the dollar in early trading on Thursday, but at $1.3264 at 0817 GMT remained some way away from the two-week high of $1.3321 hit the day before.

Against the euro, sterling was flat at 87.74 pence at 0819 GMT. It hit a 4-1/2 month of 87.33 pence in the previous session.

With the BoE expected to raise rates against the backdrop of weaker economic growth reported than before any other rate hike in the past 20 years, close attention will also be paid to the concomitant publication of its quarterly Inflation Report.

"While the extent of division on the (BoE's rate-setting committee) will be important, will it be 7-2, 6-3 or 5-4 in favour of a rate rise, the key test will be what comes after that," Michael Hewson, analyst at CMC Markets, wrote in a note to clients.

"The key test (will be) how the bank sees the UK economy, through the prism of its latest quarterly inflation report," he added, referring to a report the Bank is expected to publish along with its rate decision at midday today.