Sterling strengthens against dollar as chances of Fed 'skip' rise

© Reuters. FILE PHOTO: Woman holds British Pound banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration

By Amanda Cooper

LONDON (Reuters) - The pound edged up on Thursday, taking advantage of a dip in the dollar after Federal Reserve officials indicated the central bank might skip a rate hike this month, while UK data painted a picture of an increasingly gloomy economy.

Data from the Bank of England (BoE) showed British lenders approved fewer mortgages in April than in March and the value of new loans also fell, highlighting the softness in the housing market.

A separate report earlier from mortgage lender Nationwide showed UK house prices fell by the most since 2009 in the 12 months to May, and the country's housing market faces further headwinds after a recent jump in borrowing costs.

Sterling was last up 0.2% against the dollar at $1.2467 and flat against the euro at 85.90 pence, close to its strongest in six months.

The pound fell by 1% against the dollar in May, its largest monthly slide since February's 2.8% loss, but it's still up 3.1% so far in 2023. Against the euro, sterling gained 2% last month - the most in a month since last July. But analysts say this apparent show of strength is something of a mirage.

Britain has the slowest growth and the highest inflation within the Group of Seven economies. The BoE, which many believe was too slow to raise interest rates, will probably have to raise rates again this month, which in theory should give the pound an edge against the dollar.

UK inflation fell to 8.7% in April from a peak of 11.1% in October, while U.S. inflation is down to 4.9%, from 9.1% last June - when UK inflation was at 9.4%.

Since then, the BoE has raised rates by 350 basis points to 4.50%. The Fed, meanwhile, took just seven months from that time to raise rates by the same amount and U.S. rates are at 5.25%.

"If UK inflation remains stubbornly high on a relative basis, I see more downside than upside sterling potential — on the view that currencies will be rewarded when their respective central banks have more success in bringing inflation down. A failure to do so carries too many economic, fiscal, and balance of payment negatives," BMO global currency strategist Stephen Gallo said.

Indeed, BoE policymaker Catherine Mann said on Wednesday the UK had a bigger inflation problem than either the United States or the euro zone.

Mann said core inflation was showing signs of being kept high by British businesses' ability to push through price rises, as well as increased wages, while headline inflation had also been slower to fall back towards the core rate than elsewhere.

"The gap (between headline and core CPI) that I have in my country is more persistent than the gaps that we see in either of my neighbours, the U.S. or the euro area," Mann said in a policy discussion hosted by Swiss asset manager Pictet.