Bloomberg News

Pound Weakens on Speculation Bank of England Will Resume Easing

November 17, 2012

The pound fell against the euro and the dollar this week as the Bank of England said U.K. growth will remain “subdued,” leaving the door open for further stimulus to boost the economy.

The U.K. currency snapped a three-week advance versus the euro as a report showed Britain’s retail sales fell more last month than economists forecast, adding to signs the economy is struggling to recover. Sterling has still strengthened almost 4 percent against the 17-nation currency this year as the euro- area debt crisis spurred demand for safer assets. U.K. government bonds were little changed this week.

“Weak economic numbers and comments from the Bank of England presented a downside risk for sterling in the near term,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in London. “Our view remains, however, that as long as the euro debt crisis is unresolved, sterling will benefit from a safe-haven status.”

The pound declined 0.3 percent this week to 80.15 per euro at 5 p.m. in London yesterday, after strengthening 1.7 percent during the previous three weeks. The U.K. currency fell 0.2 percent this week to $1.5866. It fell to $1.5829 on Nov. 15, the weakest level since Sept. 5.

The central bank lowered its forecasts for the U.K. economy in its quarterly inflation report released Nov. 14, and said there was a heightened risk of “persistent low growth.”

‘Unappealing Combination’

“We face the rather unappealing combination of a subdued recovery with inflation remaining above target,” Bank of England Governor Mervyn King told reporters that day. “The Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.”

The central bank voted to end its current program of asset purchases at 375 billion pounds at its meeting on Nov. 7-8. Minutes of the gathering will be released on Nov. 21. Policy makers next meet on Dec. 5-6.

Sterling has weakened 2.1 percent in the past six months, the second-worst performer after the yen of the 10 developed- market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro declined 1.8 percent and the dollar dropped 1.7 percent.

The yield on the benchmark 10-year gilt fell less than one basis point, or 0.01 percentage point, this week to 1.73 percent. The 1.75 percent bond due in September 2022 rose 0.03, or 30 pence per 1,000-pound face amount, to 100.165.

The U.K. will auction 4.5 billion pounds of five-year gilts on Nov. 20 and 2.5 billion pounds of bills on Nov. 23.

Gilts returned 3.4 percent this year through Nov. 15, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4 percent and U.S. Treasuries rose 2.8 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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