Sterling slipped from a two-month high against the dollar on Thursday, with the U.S. currency buoyed by Federal Reserve minutes that supported expectations the central bank will soon start unwinding its easy monetary policy.
While UK debt yields kept pace with the rise in U.S. yields to hit fresh two-year highs, investors remain confident that the Fed will become the first central bank to scale back its asset purchase programme, possibly as soon as next month.
In contrast, they expect Bank of England chief Mark Carney to talk down a sharp rise in UK market interest rates, perhaps as early as next week, and reiterate his pledge to keep rates low until end-2016 as laid out in the forward guidance plan.
That kept investors wary of the pound.
Sterling fell 0.5 percent to $1.5585, off a two-month high of $1.5718 struck the previous day. Traders cited resistance at its 200-week moving average of $1.5754.
Sterling also lost ground against the euro, which was helped by a better-than-expected euro zone Purchasing Managers' Index survey . The common currency was up 0.4 percent against the pound at 85.68 pence, well above its 1-1/2 month low of 85.05 pence struck last week.
"The Fed minutes have given a fillip to the dollar," said John Hardy, currency strategist at Saxo Bank. "We expect sterling/dollar's upside to hold at around $1.57/1.58 since the BoE could increase its rhetoric and express concerns about the recent rise in market interest rates."
Earlier this month, Carney pledged to keep UK interest rates low until unemployment falls to 7 percent, which the central bank sees as unlikely for another three years.
Improving economic conditions have cast doubt on that timetable and helped sterling gain 2.5 percent against the dollar and around 2 percent against the euro so far this month. The currency has tracked a broad rise in bond yields and market interest rates, with sterling overnight interbank average rates pricing in a rate hike in early 2015.
"We now expect the pound's resilience to fade as the dollar's recovery broadens," Morgan Stanley said in a note. "A move below the $1.5550 level will provide the first sign of renewed weakness, suggesting that the month-old recovery has run its course. Hence, we maintain our bearish strategy."
