Bloomberg News

Pound Fluctuates Versus Euro Before BOE Stimulus, Rate Decision

October 06, 2011

Oct. 6 (Bloomberg) -- The pound swung between gains and losses against the euro before the Bank of England’s latest interest-rate decision amid speculation it will restart a bond- purchase program to help revive the U.K. economy.

The Monetary Policy Committee will leave its key rate unchanged at 0.5 percent, according to all 53 economists surveyed by Bloomberg. Eleven of 32 respondents surveyed separately predict at least a 50 billion-pound ($77 billion) increase in its asset-purchase program, known as quantitative easing.

“The market is still focused on the likelihood of further QE by the November meeting,” said Ian Stannard, London-based head of European currency strategy at Morgan Stanley. “The BOE will move towards further QE in coming months and ultimately sterling will come under pressure.”

The pound was little changed at 86.26 pence per euro as of 11:07 a.m. in London, after earlier dropping 0.4 percent. It was 0.1 percent weaker at 118.62 yen and strengthened 0.1 percent to $1.5481.

The Stoxx Europe 600 rose 1.6 percent and the U.K.’s FTSE 100 Index advanced 1.4 percent.

Morgan Stanley recommends selling the pound on any “relief rallies” that are likely to occur should the central bank refrain from announcing further stimulus for the U.K. economy.

The Bank of England has faced pressure to embark on more quantitative easing to help revive an economy battling the steepest government spending cuts since World War II and a worsening euro-area debt crisis.

‘Awful’ U.K. Growth

The U.K.’s economy grew less than expected in the second quarter, expanding 0.1 percent from the first three months of the year, the Office for National Statistics said yesterday. That was lower than the 0.2 percent previously published by the statistics body and also missed the 0.2 percent expansion forecast in a Bloomberg survey of economists.

“There’s a reasonable chance that the Bank of England could do something as early as today,” said Elisabeth Afseth, a fixed-income analyst at Evolution Securities Ltd. in London. “We had the downward revision of the Q2 GDP numbers which were pretty awful even before, so I don’t think there’s anything in the data that would really stop them.”

If the central bank doesn’t announce an expansion of stimulus today “it’s probably a matter of waiting a month, rather than it not happening,” Afseth said. “That ought to give a little bit of support to the gilts.”

The U.K. 10-year gilt yield was little changed at 2.36 percent. The 3.75 percent security due September 2021 traded at 112.225. The two-year note yielded 0.58 percent.

Gilts have returned 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing 8 percent for German bunds and 5.8 percent for French securities.

The pound has declined 1.3 percent in the past six months, according to Bloomberg Correlation-Weighted Currency Indexes, which measure a basket of 10 developed-market currencies.

--With assistance from Garth Theunissen. Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

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


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