Bloomberg News

Pound Rises Before Carney Testimony, Rate Decision; Gilts

February 06, 2013

The pound rallied from near a 15- month low versus the euro amid speculation it had weakened too far on bets the next Bank of England governor Mark Carney would boost efforts to spur the economy when he takes over in July.

Britain’s currency strengthened against all but two of its 16 major counterparts before Carney testifies to U.K. lawmakers in London tomorrow. Economists predict the central bank will leave its benchmark interest rate at a record-low 0.5 percent and maintain its asset-purchase target at 375 billion pounds ($588 billion) when it meets the same day. Gilts rose after a report showed house prices declined in January.

“I am relatively optimistic on sterling at these levels,” said Geoff Kendrick, head of European currency strategy at Nomura International Plc in London. “Carney’s speech will be interesting tomorrow, there will be focus on what he’s going to do when he takes over. Sterling has overreacted to the idea that the BOE will take extreme measures and I think markets will pare back some of the bearishness.”

The pound gained 0.4 percent to 86.40 pence per euro at 5:06 p.m. London time. The U.K. currency depreciated to 87.17 pence on Feb. 1, the weakest since October 2011. Sterling was little changed at $1.5656 after dropping to $1.5631 yesterday, the lowest since Aug. 10. It slid 0.1 percent to 146.56 yen.

Currency Indexes

Sterling has dropped 4 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 2.9 percent and the dollar was little changed.

The pound weakened amid speculation the U.K. may lose its top credit rating. Standard and Poor’s said in December there is a one-in-three chance it will cut its AAA rating in the next two years after joining Fitch Ratings and Moody’s Investors Service in downgrading Britain’s outlook to negative.

Carney, currently Governor of the Bank of Canada, said on Jan. 26 that central banks aren’t “maxed out” on what they can do to boost their economies. Any comments on the British economy would come as the country flirts with a triple-dip recession amid the tightest fiscal squeeze since World War II.

“The debate on what kind of stimulus can be done is rising again and we might hear something from Carney,” Laurent Fransolet, London-based head of European fixed-income strategy at Barclays Plc, said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua and Guy Johnson. “The market has already priced that in to a certain extent.”

Gilt Yields

The 10-year gilt yield fell two basis points, or 0.02 percentage point, to 2.10 percent after rising to 2.17 percent on Feb. 4, the highest since April 20. The 1.75 percent bond due September 2022 rose 0.2, or 2 pounds per 1,000-pound face amount, to 97.01.

The 10-year break-even rate, derived from the yield difference between gilts and inflation-linked securities, fell for the first time in six days. The rate declined six basis points to 3.17 percentage points, after reaching 3.27 percentage points yesterday, the most since April 14, 2011.

Home values fell 0.2 percent from the previous month, Halifax, the mortgage unit of Lloyds Banking Group Plc, said in a statement. December’s reading was revised down to growth of 1 percent from 1.3 percent.

Gilts handed investors a loss of 2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.6 percent and Treasuries fell 1 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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


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