Dollar's woes prop struggling pound before Bank of England meets

Geoffrey Yu, senior EMEA market strategist at BNY Mellon said the central bank will now have to contend with Brexit and fiscal uncertainty and the pound's recent spell of weakness is warranted. Sterling had its worst week in six months last week, as investors grew more pessimistic about the chances of a Brexit deal being reached before the December 2020 deadline.

A deepening dollar selloff propped up the British pound on Wednesday, putting it on track for its biggest daily rise in 2-1/2 weeks before a central bank meeting on Thursday where policymakers may strike a downbeat assessment for the struggling economy.

The greenback fell broadly against its rivals as bets grew the U.S. Federal Reserve might hint at more policy action at the conclusion of a meeting. The Fed decision is due at 1800 GMT. Markets are keen to see the Fed's economic projections, and particularly whether it spells out where it sees inflation headed and what exactly that means for interest rates.

"Major currencies are up against the dollar including the pound with the oil price rise also helping," said Kenneth Broux, a strategist at Societe Generale in London. "It seems to be risk on into the Fed." Leaving aside the pre-Fed policy decision bounce, the odds are stacked in favour of further pound weakness.

While the Bank of England is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising for the economy due to rising Brexit uncertainty and renewed restrictions on social activity. Geoffrey Yu, senior EMEA market strategist at BNY Mellon said the central bank will now have to contend with Brexit and fiscal uncertainty and the pound's recent spell of weakness is warranted.

Sterling had its worst week in six months last week, as investors grew more pessimistic about the chances of a Brexit deal being reached before the December 2020 deadline. After throwing Brexit trade talks into disarray by proposing legislation that would break international law by breaching parts of the Withdrawal Agreement, Prime Minister Boris Johnson faces a rebellion from his own lawmakers as the proposed bill, called the Internal Markets Bill, moves through parliament this week.

The pound rebounded 0.5% to $1.2954, moving away from a late July low of $1.2768 hit last week. Against the euro, the pound edged 0.24% higher at 91.67 pence. Economic concerns also weighed after Tuesday's data showed Britain's unemployment rate rising for the first time since the coronavirus lockdown began in March.

That prompted investors to ratchet up expectations that the pound is likely to remain volatile in the coming weeks with one-month volatility gauges trading higher than their one-year counterpart on Wednesday.

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