The pound fell from a two-week high against the dollar after a report showed U.K. inflation unexpectedly slowed, stoking speculation the Bank of England will take further measures to stimulate the economy.
Sterling weakened versus most of its major counterparts after the Office for National Statistics said annual consumer- price inflation cooled to 2.4 percent in June, from 2.8 percent the previous month. Economists surveyed by Bloomberg News forecast no change. The pound extended declines against the U.S. currency after Federal Reserve Chairman Ben S. Bernanke refrained from announcing specific steps to spur U.S. growth. U.K. gilts were little changed.
The inflation data shows “there is scope for the Bank of England to maintain its dovishness,” said Ian Stannard, head of European currency strategist at Morgan Stanley in London. This will probably “keep sterling under pressure, particularly in an environment where the global growth picture is starting to deteriorate once again,” he said.
The pound declined 0.2 percent to $1.5613 at 5:12 p.m. in London after rising to $1.5678, the highest level since July 4. Sterling gained 0.2 percent to 78.35 pence per euro. It earlier reached 78.31 pence, the strongest since October 2008.
The Bank of England added 50 billion pounds to its asset- purchase program this month as slowing inflation gave policy makers scope to spur an economy struggling to emerge from its first double dip recession since 1975. The central bank bought 1 billion pounds of gilts due in more than 15 years today as part of the plan.
The International Monetary Fund lowered its growth forecast for the U.K. economy yesterday. Britain’s gross domestic product will expand 0.2 percent this year and 1.4 percent in 2013, the Washington-based IMF said. That compares with forecasts of 0.8 percent and 2 percent published in April.
The “IMF’s economic forecast, with the U.K. seeing one of the biggest downward adjustments, will likely see sterling quite vulnerable,” Morgan Stanley’s Stannard said.
Bernanke said progress in reducing unemployment was likely to be “frustratingly slow” and repeated the Fed is ready to take further action to boost the recovery, while refraining from discussing specific steps.
The pound has appreciated 3.3 percent in the past six months, the best performer among 10 developed-market currencies, according to Bloomberg Correlation-Weighted Indexes. The euro dropped 3.1 percent, while the dollar gained 1.3 percent.
Sterling may decline to its June 1 low of $1.5269, the weakest since January, should it fail to break above so-called resistance at $1.5647, the 50-day moving average, according to data compiled by Bloomberg. Resistance refers to an area where sell orders may be clustered.
The 10-year gilt yield was at 1.5 percent, after falling to 1.47 percent yesterday, the lowest level since June 1. The 4 percent security due in March 2022 was at 122.32. The five-year note yielded 0.55 percent after declining yesterday to a record 0.531 percent.
The 10-year break-even rate, a gauge of inflation expectations derived from the yield difference between regular and index-linked bonds, fell as much as five basis points to 2.32 percentage points, the lowest level since September 2009.
“Inflation was lower than anybody was forecasting,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “Expectations are that break evens will go lower. We are recommending people to take short positions in break evens.” A short position is a bet an asset will fall.
Gilts have returned 4.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 4.2 percent, and U.S. Treasuries rose 2.8 percent, the indexes show.