By Amanda Cooper
LONDON (Reuters) - The pound retreated on Wednesday, as traders took profit on sterling's robust rally this month and after upbeat U.S. data gave investors an excuse to buy dollars.
Some caution was expected to stem from the European Central Bank's annual forum in the Portuguese town of Sintra at which many of the world's most influential central bankers are to speak.
Bank of England Governor Andrew Bailey takes part in a panel discussion later, together with ECB President Christine Lagarde, Federal Reserve Chair Jerome Powell and Bank of Japan Governor Kazuo Ueda.
"The question is, once again, whether BoE officials will offer any kind of push-back against those tightening expectations, perhaps to offer some respite to the troubled UK mortgage market," ING currency strategist Francesco Pesole said.
"That hardly seems like a logical move in our view after the hawkish 50bp hike last week and before having seen evidence that price pressures are abating at all."
Sterling was last down 0.46% against the dollar at $1.269 and down 0.3% against the euro at 86.28 pence.
In June, the pound has risen by 2.3% against the dollar, set for its largest monthly increase since a 2.6% gain in March. It has risen by 5.6% year on year this month, the largest annual increase since October 2021.
Speculators, including hedge funds, have loaded up on sterling this month, in anticipation that the BoE will have to raise rates by more than policymakers have signalled, as inflation is too far above the Bank's 2% target and price pressures are becoming entrenched in the broader economy.
Sterling's strength has been most apparent against the euro, which has lost 2.6% in value against the pound this year, as borrowing costs for the UK have soared above those for the euro zone to their largest premium since mid-1991. Investors therefore have a powerful theoretical incentive to own UK assets rather than euro-based ones.
Money markets show traders believe UK rates will reach at least 6% by the end of this year, compared with an anticipated year-end rate of around 3.9% for the euro zone.
"With 119 basis points of BOE hikes priced by year end, a number we think they won’t deliver (we expect 75bps), it makes it clear to us that the downtrend in euro/sterling over May and June is over in our view," Nomura currency strategist Jordan Rochester said.
"The question is, will the next few weeks provide negative UK data surprise momentum to change the narrative?"