Sterling edges higher before BOE rate vote this week
In normal circumstances, monetary tightening might strengthen the pound significantly, but with a potentially messy Brexit nearing, analysts said.
The pound rose on Monday but its modest gains reflected concern among investors about the currency's prospects before a widely anticipated Bank of England interest rate hike this week.
The Bank of England (BoE) looks set to pass a post-financial crisis milestone on Thursday by finally raising interest rates above their emergency levels set more than nine years ago.
In normal circumstances, monetary tightening might strengthen the pound sign, but with a potentially messy Brexit nearing, the BoE may sound cautious about the pace of further moves away from it stimulus programme, analysts said.
"We judge that the balance of risks is skewed to the downside for the pound from the BoE's upcoming policy meeting," said analysts at MUFG.
"A rate hike is almost fully priced in and the BoE is unlikely to deliver a hawkish policy signal at the current juncture."
Sterling has fallen for three consecutive weeks against the dollar. That is despite markets pricing in an 86 percent chance of a 25 basis point increase at Thursday's policy meeting.
The pound on Monday climbed 0.2 percent higher at $ 1.3145. Against the euro, it traded broadly flat at 89.08 pence.
With just over eight months left until Britain is due to leave the European Union, there is little clarity about how the trade will flow, as Prime Minister Theresa May tries to strike a deal with the bloc.
Brexit uncertainty and soft wages data has prompted analysts to push back their expectations for the next rate hike, with Goldman Sachs predicting the next increase only in the second quarter of 2019.
European Union Brexit negotiator Michel Barnier rejected key elements of Britain's new trade proposals on Thursday.
Markets are perturbed by the prospect of Britain crashing out of Europe without a trade deal and being left isolated.
"Suddenly, analysts are afraid of a 'hard Brexit'. Even a rate step by the Bank of England on Thursday, which is widely expected, will not do much to calm these fears," said Commerzbank currency strategist Ulrich Leuchtmann, in Frankfurt.
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