Pound Rises Amid Softer Dollar as Markets Eye BoE's Next Move

The pound edged higher against a broadly softer dollar, as markets shifted focus from Britain's upcoming general election to the outlook for monetary policy. The Bank of England kept its interest rates steady, but a potential rate cut in August has been hinted, influencing market expectations.

The pound edged higher against a broadly softer dollar on Monday, as markets looked beyond Britain's upcoming general election and instead set their focus on the outlook for monetary policy.

The pound was last up almost 0.2% against the dollar at $1.2664, having fallen to $1.2622 on Friday, its lowest level since May 15. Britain heads to the voting booth on July 4 but with polls steady and signalling the opposition Labour Party is likely to win a majority, markets are showing little concern about the outcome.

"Given the stability in the polls, a Labour victory looks like a foregone conclusion," said Simon Harvey, head of FX analysis at Monex. "There's not much room for fiscal manoeuvre whoever comes in so it doesn't make the UK election a major market event."

Instead, much of the focus remains on the outlook for monetary policy. The Bank of England last week held its main interest rate steady at a 16-year high of 5.25%, but the prospect of a future rate cut moved closer as some policymakers said their thinking was now "finely balanced".

"We believe the Bank of England took a step in the direction of an August rate cut last week," ING FX strategist Francesco Pesole said. Money markets imply around a 50% chance of a quarter-point rate cut at the central bank's August meeting.

"We see the Bank of England joining the global easing cycle but they are starting from a higher base than others," Monex's Harvey said, citing the European Central Bank and Swiss National Bank, who have both already lowered interest rates in this global easing cycle. "We are bullish on sterling but we prefer to express it in crosses just because the dollar dynamic is posing a lot of uncertainty," Harvey added.

The U.S. dollar index, which measures the currency against six others, was down 0.3% on Monday but remained close to an almost eight-week high reached last week as the Federal Reserve's more patient rate outlook continues to diverge from peers. The pound was down around 0.2% to 84.75 pence per euro its weakest level in two weeks.

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