British Pound Snaps Nine-Day Advance Versus Dollar on Bets Rally Overdone

The pound snapped a nine-day rally against the dollar amid better-than-expected U.S. housing data and signs of weakness in the U.K. economy.

Sterling slipped against 13 of its 16 most actively traded counterparts. Sales of U.S. previously-owned homes jumped more than forecast in December, according to figures published today. Employment data in the U.K. showed youth unemployment increasing to the highest since at least 1992 and pay growth trailing the inflation rate, even as overall jobless claims fell.

“The dollar is really reacting positively to the stronger data out of the U.S.,” said Ian Stannard, senior currency strategist at BNP Paribas in London.

The pound slid 0.9 percent to $1.5850 as of 3:50 p.m. in London. Sterling was 0.4 percent weaker at 84.53 pence per euro, a third day of losses against the common European currency.

Britain’s currency had advanced 3.4 percent against the dollar over the nine days through yesterday, its longest streak of gains since the beginning of August, on speculation accelerating inflation would force the Bank of England to raise borrowing costs.

Consumer inflation quickened to 3.7 percent in December, the U.K. statistics office said Jan. 18, faster than the 3.4 percent rate forecast in a Bloomberg survey and up from 3.3 percent the previous month.

Unemployment

The U.K. jobless report released yesterday showed pay growth including bonuses underperformed the inflation rate, rising to 2.1 percent in three months through November from a year earlier. The report also showed joblessness among 16-24- year-olds climbed to 20 percent. The unemployment rate as measured by International Labour Organization standards was unchanged at 7.9 percent.

Today’s decline in the pound was the third straight day that it failed to sustain a breach of $1.60.

“The fact that sterling is stalling at this psychological resistance level is not surprising,” Sue Trinh, a Hong Kong- based senior currency strategist at Royal Bank of Canada, said in a telephone interview from London. “The underperformance reflects the fact that market expectations for rate hikes this year have perhaps gone a bit too far.”

The Bank of England last week maintained its key rate at 0.5 percent and kept its bond-purchase program, known as quantitative easing, unchanged. Policy makers are forecast to raise the benchmark rate 25 basis points to 0.75 percent in the third quarter of this year, according to the median forecast of economists in a Bloomberg survey.

BOE Risk

“The problem for the Bank of England is that if they raise interest rates too early, they risk stalling the recovery,” said Chris Walker, a Group-of-10 currency strategist at UBS AG in London. “On the other hand they risk losing credibility if they don’t hike.”

UBS expects the central bank will raise its 0.5 percent main rate by 25 basis points, or 0.25 percentage point, in July “with perhaps one more rate hike towards year-end,” said Walker. The bank estimates the pound will slide to $1.53 over the next one to three months, he added.

U.K. government bonds fell, with the yield on the benchmark 10-year gilt climbing six basis points to 3.69 percent. The 4.75 percent security due March 2020 declined 0.495, or 4.95 pounds per 1,000-pound face amount, to 108.12. Two-year yields also climbed six basis points, to 1.35 percent.

To contact the reporter on this story: 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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