Bloomberg News

Pound Falls to 15-Month Low as Faltering Economy Curbs Rate Bets

July 01, 2011

July 1 (Bloomberg) -- The pound headed for its biggest weekly decline in a month against the euro as signs that the U.K. economic recovery is faltering reduced the scope for interest-rate increases from the Bank of England.

Sterling declined versus 12 of its 16 major counterparts tracked by Bloomberg this week, losing most against the Swedish krona and reaching a 15-month low versus the euro. Reports this week showed U.K. confidence fell and manufacturing growth unexpectedly slowed in June while a Credit Conditions Survey by the central bank predicted mortgage demand to drop in the third quarter. Bank of England policy maker Adam Posen said on June 27 that a call by the Bank for International Settlements for higher rates worldwide to curb inflation was “nonsense.”

“Sterling is being completely marginalized by the worsening economic growth outlook in the U.K.,” said Peter Rosenstreich, chief foreign-exchange analyst at Swissquote Bank SA in Geneva. “If we continue to see an erosion in growth prospects then the possibility of rate hikes is virtually out of the question.”

The pound slid 1.5 percent this past week to 90.26 pence per euro as of 4:23 p.m. in London, from 88.90 pence on June 24. It reached 90.84 earlier today, the weakest intraday level since March 2010. Sterling gained 0.8 percent against the dollar to trade at $1.6081, from $1.5959 at the end of last week. Against Japan’s currency, the pound added 1.3 percent to 129.96 yen.

Interest-Rate Bets

Worsening economic growth has prompted traders to reduce bets on higher rates, with the implied yield on short-sterling futures expiring in March falling one basis point to 1.04 percent, down from a nine-month high of 2.08 percent in February. Investors are betting the central bank will raise borrowing costs next May, according to forward contracts on the sterling overnight interbank average, data from Tullett Prebon Plc show. As recently as February, traders were betting on a rate increase in May of this year, the data showed.

Deutsche Bank AG pushed back its forecast for the Bank of England to increase its key interest rate and now sees the benchmark on hold until February. The bank, which previously forecast a rate increase in November, said U.K. economic growth will be slower this year than previously thought, London-based economist George Buckley said in an e-mailed note today.

Barclays Capital said yesterday that the U.K. central bank will now probably keep its main rate unchanged until May 2012, after earlier forecasting a rate increase in November.

The pound has fallen 8.9 percent in the past 12 months, making it the second-worst performer among 10 developed-market currencies after the U.S. dollar, according to Bloomberg Correlation-Weighted Currency Indexes.

The U.K. currency may decline further next week should the Bank of England keep its key interest rate at a record-low 0.5 percent on June 7 as predicted by all 51 economists in a Bloomberg survey.

U.K. government bonds fell every day this week as efforts by Greece to avoid a default curbed demand for the safest assets. The decline pushed up yields on 10-year gilts by 26 basis points to 3.39 percent, while two-year note yields climbed 13 basis points to 0.83 percent.

--Editors: Matthew Brown, Keith Campbell

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

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


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