Bloomberg News

Pound Falls as Economic Data Weakens Bets on Bank Rate Increase

June 01, 2011

June 1 (Bloomberg) -- The pound weakened and gilts rose as traders cut bets on an increase in central bank interest rates after a manufacturing index fell to a 20-month low and U.K. mortgage approvals dropped to the least in four months.

Sterling declined against all but two of its 16 major peers, reaching a record low against the Swiss franc. The manufacturing gauge, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, was less than all 26 estimates in a Bloomberg News survey. Two-year and 10- year gilt yields fell to the lowest this year, as U.S. reports showed the world’s largest economy may be slowing.

“The weak U.K. macro data raises the likelihood the Bank of England will keep interest rates on hold to stimulate the economy,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The pound should fall as a result.”

The British currency slid 0.3 percent to $1.6394 as of 4:53 p.m. in London. It depreciated 0.6 percent to 88.03 pence per euro, and slid as much as 2.2 percent to 1.3744 against the Swiss franc.

The yield on the 10-year gilt fell four basis points to 3.25 percent, the least since December, while the two-year note yield also declined four basis points, to 0.88 percent, the lowest since November. Gilts extended their advance as reports showed a slide in the U.S. Institute for Supply Management’s factory index and hiring by American employers that fell short of economists’ estimates.

U.K. Inflation

Bank of England officials are split over whether to raise borrowing costs as signs of economic growth deteriorate while inflation accelerated to 4.5 percent in April, the fastest since 2008. Former policy maker Andrew Sentance said in an interview with Sky News yesterday that the inflation rate, at more than twice the central bank’s 2 percent goal, may be hurting growth.

JPMorgan Chase & Co. economist Malcolm Barr pushed back his forecast for the Bank of England to raise its benchmark interest rate to November from August, he said in a research note today. Investors are betting on a quarter-point rate increase in February next year, according to forward contracts on the sterling overnight interbank average, or Sonia, compiled by Tullett Prebon Plc. As recently as February, investors were betting on an increase in May.

The implied yield on short-sterling futures for September 2012 fell seven basis points to 1.50 percent as investors reduced bets on higher interest rates.

Mortgages, Manufacturing

Lenders granted 45,166 loans to buy homes in April, compared with a revised 47,145 the previous month, the Bank of England said.

The CIPS manufacturing index declined to 52.1 in May from a revised 54.4 in April, according to a report published in London today. The median forecast of 26 economists in a Bloomberg News survey was for a drop to 54.1 and the lowest was for a reading of 52.6.

Gilt futures may reach as high as 120.88 should the price of the September 2011 contract breach a so-called resistance level at 120.24, UBS AG said, citing trading patterns.

The gilt futures contract expiring in September advanced 0.4 percent to 120.58.

Gilts have returned 2.5 percent so far this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming German bunds, with a return of zero. U.S. Treasuries have made investors 2.7 percent.

--With assistance from Keith Jenkins, Jennifer Ryan and Scott Hamilton in London. Editors: Mark McCord, Matthew Brown

To contact the reporter on this story: Paul Dobson in London at

To contact the editor responsible for this story: Daniel Tilles at

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