Bloomberg News

Pound Drops Most in Month Versus Dollar as BOE Cuts Forecasts

May 16, 2012

The pound weakened the most in a month against the dollar after the Bank of England cut its growth forecasts and said the U.K. economy is likely to remain “subdued.” Gilt yields dropped to records.

Sterling fell versus 13 of its 16 major peers as Governor Mervyn King said at a press conference releasing the central bank’s quarterly Inflation Report that the U.K. faced threats from the euro region’s “storm.” Five- and 10-year gilt yields dropped to all-time lows as King’s comments added to speculation policy makers will resume their program of bond purchases, or quantitative easing, which they halted this month.

“The pound is lower given King’s concerns over the euro- zone fallout and the possible negative impact on the U.K. economy,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “There were certainly no signs of further QE being off the table.”

The pound fell 0.4 percent to $1.5923 at 4:38 p.m. London time after dropping as much as 0.7 percent, the biggest decline since April 13. It earlier reached $1.5889, the lowest since April 17. Sterling slid 0.4 percent to 79.88 pence per euro.

The U.K. currency depreciated for a second day versus the greenback as the central bank said gross-domestic-product growth would be about 2.6 percent a year in two years. The Bank of England publishes its quarterly predictions in the form of fan charts without specifying exact numbers.

‘Disorderly Resolution’

“Concerns about the possibility of a disorderly resolution” in the euro area have “adversely influenced asset prices, bank funding costs and confidence,” the central bank said in the report.

The pound was the second-worst performer today among the 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes, dropping 0.3 percent.

The yield on the benchmark 10-year gilt fell two basis points, or 0.02 percentage point, to 1.87 percent after dropping to a record low 1.821 percent. The 4 percent bond maturing in March 2022 gained 0.21, or 2.10 pounds per 1,000-pound face amount, to 118.975.

The five-year yield declined as much as seven basis points to a record 0.851 percent, while two-year yields slid five basis points to 0.342 percent, the lowest since Jan. 30.

Gilts have returned 0.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries gained 1.1 percent, and German bunds rose 2.6 percent.

Jobless Claims

The pound pared losses after a government report showed claims for unemployment benefits unexpectedly dropped.

Jobless claims fell by 13,700 in April, the most since July 2010, to 1.59 million, the Office for National Statistics said in London. The median forecast of economists in a Bloomberg News survey was for an increase of 5,000.

The pound’s recent decline against the dollar may spur traders to trim bets the U.K. currency will strengthen, according to Bank of America Corp.

Futures traders added to positions betting sterling will appreciate versus the greenback to 25,339 contracts last week, the most since May 2011, figures from the Commodity Futures Trading Commission show. They now may “be forced to reduce,” driving the pound down toward its 200-day moving average of $1.5830, MacNeil Curry, a technical strategist at Bank of America Merrill Lynch, wrote in a note to clients.

“This is a market that in certain respects has defied gravity,” Curry said yesterday. “This thing has rallied quite significantly. People have gotten longer and longer. That just makes it vulnerable.” Long positions are bets that an asset will rise.

-- With assistance from John Detrixhe in New York. Editors: Nicholas Reynolds, Mark McCord

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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


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