Bloomberg News

Pound Falls Second Day Versus Dollar Before BOE Rate Decision

November 08, 2012

The pound weakened for a second day against the dollar before the Bank of England announces whether it will boost monetary stimulus for the first time since July.

Sterling declined to a two-week low versus the U.S. currency as a Bloomberg News survey showed 35 out of 45 economists forecast the central bank will maintain its asset- purchase target at 375 billion pounds ($600 billion). Policy makers increased bond purchases, or so-called quantitative easing, by 50 billion pounds in July to boost the economy. U.K. government bonds advanced.

“The majority of the market is not expecting anything from the Bank of England today given improvement in U.K. data and comments from policy makers,” said Peter Frank, global head of foreign-exchange strategy at Banco Bilbao Vizcaya Argentaria SA. (BBVA) “A slight sterling rally against the dollar and the euro would be the knee-jerk reaction to no change in policy, simply because a small section of the market is expecting more QE.”

The pound fell 0.2 percent to $1.5951 at 11:29 a.m. London time after declining to $1.5930, the weakest since Oct. 23 when it declined to $1.5914. The U.K. currency was little changed at 79.91 pence per euro.

BBVA predicts the pound will strengthen to 78 pence per euro by year-end, London-based Frank said, citing the improving outlook for the U.K. economy relative to the euro area.

Inflation Concern

Bank of England officials will confront increasing concerns about the potency of their main policy tool today as they consider halting bond purchases for an economy that may still need support.

Governor Mervyn King and the Monetary Policy Committee must decide whether to rely on QE to bolster the cooling economy, or focus on credit-boosting initiatives such as the Funding for Lending Scheme. Adding to the debate are warnings from some officials that looser policy now may not be the right move as inflation slows less than previously forecast.

The central bank completed its latest 50 billion pounds of bond purchases last week, and Deputy Governors Paul Tucker and Charles Bean have suggested that asset purchases may no longer have the same impact on the economy as when first introduced in March 2009.

The pound gained 1.4 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 3.3 percent, while the dollar dropped 1.5 percent.

The U.K. 10-year yield dropped one basis point, or 0.01 percentage point, to 1.75 percent after falling to 1.73 percent, the lowest since Oct. 15. The 1.75 percent bond due in September 2022 gained 0.105, or 1.05 pounds per 1,000-pound face amount, to 100.02.

Gilts have returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.9 percent and U.S. Treasuries earned 2.3 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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