Sterling edges higher as investors await BoE Bailey speech

© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

By Stefano Rebaudo

(Reuters) - Sterling edged higher on Monday, with investors' appetite for risky assets returning as they awaited a speech from Bank of England (BoE) governor Andrew Bailey later in the day.

News of a buyer being found for deposits and loans at Silicon Valley Bank in the U.S. cast an uneasy calm over markets on Monday, which have been shaken recently by fears of a credit crunch and systemic bank stress.

ING analysts said Bailey's words would be weighed very carefully by markets given that the March BoE meeting did not include a press conference.

Sterling rose 0.16% against the euro to 87.85 pence per euro and 0.2% versus the dollar to $1.2252.

The greenback was steady on Monday, while the yen hovered near a seven-week peak as traders assessed authorities' moves to respond to concerns over the global banking system.

The British central bank raised interest rates last week but said a surprise resurgence in inflation would fade fast, prompting speculation it had ended its run of hikes.

Britain's fiscal policy concerns are no longer an issue after British Prime Minister Rishi Sunak restored confidence among investors. Still, markets remained cautious about the pound in the face of a dovish BoE.

Most analysts see the BoE pausing in May, but some expect additional tightening to be required as the central bank's priority remains controlling inflation over banking uncertainty.

"On balance, we retain our existing BoE view: rates on hold for around a year before 75bp of cuts around the middle of 2024, with leading rates back down to 3.50% at that point," said George Buckley, an economist at Nomura.

Buckley added there were plenty of reasons to think that the hike the BoE delivered in February was the last one, including financial sector uncertainty, slowing wage growth, weak UK GDP relative to other countries, and the BoE's forecasts for sharp falls in inflation.

He also mentioned upside risks such as no dovish tilt from the BoE, 4.25% being a low peak, a tight labour market, sticky core inflation, and Bailey saying to the BBC, "if we get inflation embedded, interest rates will have to go up further."

Financial markets still price in one more quarter-point rate rise for May or June.

Supporting the case of a further rate hike, the central bank last week upgraded the outlook for Britain's economy and didn't call for a technical recession this year.

Bailey delivers a speech at the London School of Economics today at 1700 GMT and tomorrow at a Treasury Select Committee hearing on Silicon Valley Bank.

Bank of England policymaker Catherine Mann said on Friday that she voted for a quarter percentage-point interest rate rise this week rather than a bigger increase because she saw signs that inflation expectations were now falling.