Bloomberg News

Pound Weakens Versus Dollar Before BOE Stimulus, Rate Decision

October 06, 2011

Oct. 6 (Bloomberg) -- The pound weakened for a second day versus the dollar and yen 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.

Sterling dropped against all but two of its 16 major counterparts, sliding most versus the Australian dollar. 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 economists surveyed separately predict at least a 50 billion-pound ($77 billion) increase in its so- called quantitative easing program.

“There might be a short relief rally in sterling on a lack of further BOE action but it’s likely to be short-lived as 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 weakened 0.1 percent to $1.5439 at 8:54 a.m. in London. It declined 0.2 percent to 118.47 yen and was little changed against the euro at 86.36 pence.

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

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

U.K. 10-year gilt yields were three basis points lower at 2.34 percent and the two-year note yield was little changed at 0.58 percent.

--Editors: Mark McCord, Nicholas Reynolds

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