By Harry Robertson
LONDON (Reuters) – The pound dipped on Wednesday as the dollar strengthened while investors waited for the release of the Federal Reserve’s preferred gauge of inflation on Friday.
Sterling was last 0.2% lower at $1.2661, around where it has traded for the last two weeks.
The euro was down 0.1% against the pound at 84.37 pence after falling to a two-year low of 84.40 pence on June 14 after French President Emmanuel Macron’s decision to call a snap parliamentary election rocked Europe’s markets.
U.S. personal consumption expenditure inflation data, due on Friday, will guide Fed policy and could lead to swings in currency markets.
The pound has been one of the best performers this year, down just 0.4% against the dollar, compared with a 3% fall for the euro and 13% drop for the yen.
Britain’s relatively high services and wage inflation means traders expect the Bank of England to cut rates just once or twice this year. That has kept upward pressure on bond yields, making them attractive to many investors and thereby supporting the pound.
Expectations that the Labour party will win a huge majority in the July 4 general election and bring some long-absent stability to British policymaking has also been supporting sterling.
Yet economists and investors say there are risks to British financial markets from a Labour party that has been coy about its exact plans for taxing and spending.
“With fiscal responsibility, everything that Labour is doing is the polar opposite to the (Liz) Truss fiasco,” said Joe Tuckey, head of FX analysis at broker Argentex. “That’s definitely on balance a sterling-friendly dynamic.”
Yet Tuckey said the true determinant of the pound over the rest of the year would be Bank of England interest rate policy.
“If you’re talking about sterling in the medium term, between now and year-end, this election is not the main driver,” he said. “We’ll be back to looking at whether the Bank of England cuts in August.”
The dollar index, which measures the currency against six major peers, was last up 0.2% at 105.88.
(Reporting by Harry Robertson; Editing by Alex Richardson)
