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

"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 (BoE) is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising due to growing Brexit uncertainty and renewed restrictions on social activity.

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

The greenback fell broadly as bets grew the U.S. Federal Reserve might hint at more policy stimulus at the conclusion of a meeting. The Fed decision is due at 1800 GMT. Markets are keen to see the U.S. central bank's economic projections, and particularly whether it spells out where it sees inflation headed and what 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 (BoE) is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising due to growing Brexit uncertainty and renewed restrictions on social activity. Geoffrey Yu, senior EMEA market strategist at BNY Mellon, said the BoE would now have to contend with Brexit and fiscal uncertainty, and the pound's recent weakness was 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. The pound rebounded 0.8% to $1.2997 on Wednesday, moving away from a late July low of $1.2768 hit last week.

Against the euro, it was 0.9% higher at 91.07 pence, helped by a BBC report that the UK government had reached a deal to avert a rebellion by members of its own Conservative party over powers within a proposed Brexit-related bill that break international law. Economic concerns weighed, however, after data on Tuesday 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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