Sterling slips as investors pare BoE rate hike bets ahead of Jackson Hole

By Johann M Cherian

Aug 27 (Reuters) - Sterling eased to a one-week low against the dollar and the euro as investors pared expectations for an interest rate hike by the Bank of England this year and shifted their focus to the annual symposium on monetary policy at Jackson Hole in the U.S.

The British pound dipped 0.1% to $1.3578 on Thursday, retreating from last week's six-month high. It was off nearly 0.1% at 85.75 pence versus the euro.

LSEG data showed that traders now expected the central bank to hike interest rates by 24.7 basis points by December, meaning they no longer expect a 25-bp hike by the BoE this year.

This reflected that markets were slowly coming into alignment with most economists, who have long said in Reuters polls that the BoE is likely to hold rates steady this year.

Two-year gilt yields, which move in lockstep with rate expectations, were also a touch softer at 4.36% as Brent crude prices hovered near a two-week low, with investors watching mediation efforts to end the Mideast conflict.

Chris Beauchamp, chief market analyst at IG Markets, said he was sceptical that the BoE would increase borrowing costs in 2026.

"It would probably make life unnecessarily tricky for the UK economy and certainly for the government as well. The approach will be cross your fingers and hope that oil continues to stay at least contained at these levels."    

Sterling rallied earlier this year and is among the best-performing developed market currencies on the back of expectations that the BoE would raise rates to combat energy-induced inflation pressures, and also reflecting stronger-than-expected UK economic data.

Later on Thursday the focus will turn to the start of the Jackson Hole economic symposium in the U.S., where markets will scrutinize Federal Reserve Chairman Kevin Warsh's remarks on Friday for any hints on monetary policy outlook.

Attention next week will shift to parliament resuming session and markets will look for clues on how the Andy Burnham administration is likely to fund some ambitious policies, ahead of the October budget.

The UK's elevated budget debt levels are a major concern for investors.  

"People expect a government that will look to find new ways to raise taxes and to try and fulfil what it wants to do," Beauchamp said.

"It's going to be a hard sell for this government to sort of maintain this credibility angle that they were so big on just a few weeks ago."

(Reporting by Johann M Cherian in Bengaluru; Editing by Alexandra Hudson)