Bloomberg News

Pound Rises on Narrower Trade Deficit; BOE Keeps Rate Unchanged

June 09, 2011

June 9 (Bloomberg) -- The pound rose against the yen as a report showed the U.K. trade deficit narrowed more than forecast in April and the Bank of England kept its benchmark interest rate on hold.

Sterling strengthened against 11 of its 16 major peers tracked by Bloomberg. The U.K. currency was within a penny of a one-month low versus the euro amid speculation the European Central Bank will signal it may increase rates as soon as next month. The Bank of England kept interest rates at a record low, as predicted by all 55 economists in a Bloomberg News survey.

“The sharp improvement in the U.K. balance of late is potentially significant for sterling,” Adrian Schmidt, a currency strategist at Lloyds Bank Corporate Markets in London, wrote in an investor report today. “An improvement in the trade picture may mean sterling outperforms.”

The pound climbed 0.3 percent to 131.40 yen and was little changed at $1.6403 as of 12:02 p.m. in London. The U.K. currency traded at 88.95 pence per euro from 88.90 pence yesterday in New York. It rebounded yesterday after touching 89.76 pence, the weakest level since May 5.

U.K. 10-year government bonds rose, with the 10-year yield two basis points lower at 3.27 percent. The two-year yield was little changed at 0.85 percent.

The goods-trade gap was 7.4 billion pounds compared with 7.7 billion pounds in March, the Office for National Statistics said today.

Before today, sterling fell against the euro on all but one day this month as investors added to bets that the central bank will keep interest rates on hold while the government reduces spending to trim Britain’s deficit.

BOE Rates Hold

Sterling has weakened 3.6 percent against the euro this year amid signs that the government’s austerity drive is damping growth and will compel the Bank of England to keep interest rates on hold. Chancellor of the Exchequer George Osborne said two days ago he rejected calls for a “Plan B” to scale back his deficit-reduction plan. The International Monetary Fund said it endorsed the government’s strategy, while cautioning that the U.K. faces risks to growth and employment.

The Bank of England has kept its main interest rate at a record-low 0.5 percent since March 2009, and bought 200 billion pounds of bonds under a so-called quantitative-easing program that ended in January 2010. Traders are speculating that policy makers will hold interest rates until April, according to Tullett Prebon Plc data showing forward contracts on the sterling overnight interbank average. As recently as February, investors bet the rate would be lifted last month.

Short-Sterling Futures

“Markets have started to price in a more reasonable expectation of Bank of England policy and that’s tended to weigh on sterling,” said Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London.

The yield on short-sterling futures for June 2010 fell three basis points to 1.22 percent, signaling investors were curbing bets for higher borrowing costs.

The pound strengthened against the euro after the last Bank of England decision on May 5, when policy makers kept the benchmark rate unchanged, as ECB President Jean-Claude Trichet signaled euro-area interest-rate increases may be later than expected.

The ECB is likely to “press on” with raising rates today, said Ken Wattret, chief euro-region economist at BNP Paribas SA in London.

--Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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