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UPDATE 1-Global sell-off, BoE uncertainty, gas prices push sterling lower

Mon, 20th Sep 2021 16:14

(Adds comments, context, updates prices)

By Julien Ponthus

LONDON, Sept 20 (Reuters) - Sterling hit a one-month low
against the dollar on Monday as a global sell-off prompted by
China's struggling Evergrande hit risk-oriented currencies while
uncertainties about the Bank of England's monetary policy and
surging gas prices also weighed.

At 1437 GMT, the pound was 0.49% lower against the
dollar at $1.3659, its lowest level since Aug. 23. Versus the
euro, sterling fell 0.52% at 0.8579 pence, a low not
reached since Sept. 9.

Default worries surrounding China's Evergrande, the world's
most indebted property developer, triggered a sell-off in Asia
which spread to Europe and Wall Street as local bourses opened.

European banks were on course for their worst
session in a year while in the U.S. the banking sub-index
dropped over 3% as investors flocked to the safety of
government bonds, pushing yields sharply lower.

On foreign exchange markets, traders turned to the safe
haven of the greenback which touched a four-week high on the
dollar index at 93.4.

"What we are seeing is all risk currencies taking a hit
across the board", said Jeremy Stretch, head of G10 FX strategy
at CIBC Capital Markets.

He added that domestic factors were also at play for the
British currency, with the surge in gas prices causing an
additional headwind.

Britain is considering offering state-backed loans to energy
firms after wholesale gas prices soared, prompting big suppliers
to ask for support from the government to cover the cost of
taking on customers from companies that have gone bust.

Another headache for traders were the uncertainties linked
to what could emerge about the future of monetary policy at the
Bank of England meeting on Thursday.

Jane Foley, a strategist at Rabobank, told her clients she
might review her targets for the British currency downwards
after the BoE meeting.

"The market is likely coming to terms with diminishing
expectations", she wrote, noting weakening macro indicators such
as weak retail sales in July.

BoE rate-setters who may have been tempted to vote for an
early end to their COVID-19 stimulus plans may hold off for now,
with a slowing economy but surging inflation making for a tricky
backdrop.

Last month, Michael Saunders was the only Monetary Policy
Committee member to vote for an early end to the British central
bank's purchases of government bonds, on the basis that
continued buying risked a more aggressive tightening of monetary
policy in future.

Since then, BoE Governor Andrew Bailey revealed that four of
the eight MPC members who voted last month - himself included -
thought some initial conditions had been met to begin exploring
the possibility of raising interest rates.
(Reporting by Julien Ponthus; Editing by Emelia
Sithole-Matarise and Ed Osmond)

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