U.S. rate hike outlook dampens for pound

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U.S. rate hike outlook dampens for pound

Dec 10 Reuters -- The British pound fell to within a few inches of its 2021 low against the dollar as the UK's pandemic curbs and weak economic data dampened expectations that the Bank of England would raise interest rates soon.

Britain's economy grew by a weaker than expected 0.1% in October, leaving it 0.5% smaller than in February 2020, just before the country went into its first COVID 19 lock-down, the Office for National Statistics said.

The dollar was firm as traders wagered U.S. inflation figures that could settle the course of interest rate rises next year.

The pound was at $1.3211, down 0.1% against the dollar, not far from Wednesday's low of $1.3162 from the 2021 low of $1.3162.

It was flat against the euro at 85.43 pence.

Analysts said they expected the central bank to keep interest rates unchanged at the next policy meeting and tighten from February 2020, despite the fact that they had been looking at their forecasts for UK interest rates.

In a note to customers, Commerzbank analysts said that the recent developments surrounding Omicron have sparked doubts about a hike in February.

They said that sterling is unlikely to come under severe depreciation pressure if the market believes that a rate hike is only being postponed to February. If the BoE doesn't give reasons to doubt this, sterling might depreciate further. Money market futures are now pricing in a 38% probability of a 15 bps rate hike next week, compared to 46% on Wednesday and nearly 70% at the beginning of last week.

There was a dispute over post-Brexit fishing licences that weighed on sentiment.

France's junior European Affairs Minister Clement Beaune said Britain tried to isolate France, but the bloc stood united. He said that France would ask the European Union to start a lawsuit if the fishing issue is not resolved by a Friday deadline.