The pound fell for a second day versus the euro on speculation the Bank of England will cut its growth forecasts in its quarterly Inflation Report tomorrow, underlining the case for keeping interest rates at a record low.
The U.K. currency reached the weakest level in six months against the dollar even as a report showed the U.K. inflation rate stayed at the highest since May. Sterling slumped the most in eight months against the yen after a Group-of-Seven official said the world’s major industrial nations are concerned about excessive moves in Japan’s currency. A gauge of volatility on the pound versus the euro climbed to a seven-month high. U.K. government bonds were little changed.
“The inflation numbers we’ve seen today aren’t going to cause the BOE to start tightening,” said Simon Smith, chief economist at FxPro Group Ltd. in London. “The economy’s just too weak for that. The relationship between the data and the currencies has become more complex. We’re not seeing firmer data reducing stimulus expectations. The pound can weaken further.”
The pound weakened 0.4 percent to 85.97 pence per euro as of 4:44 p.m. in London after declining 1.2 percent yesterday. The U.K. currency was little changed at $1.5653 after dropping to $1.5573, matching the low set on Aug. 8. Sterling slid 1.3 percent to 145.85 yen.
U.K. policy makers said after their Feb. 7 meeting that inflation may stay above its 2 percent target for the next two years. With the economic recovery struggling to gain momentum, the Bank of England said it was right to “look through” this period of above-target price growth.
“The Inflation Report forecasts, out tomorrow, will give the BOE another chance to reiterate its guidance on future policy,” Rob Wood, an economist at Berenberg Bank in London and a former Bank of England official, wrote in a note to clients. “The new inflation forecast is likely to be above target until 2015. That should not lead to tighter policy.”
The pound weakened 0.4 percent against the euro and dropped 0.2 percent versus the dollar after the central bank published its previous Inflation Report on Nov. 14.
Consumer prices rose 2.7 percent from a year earlier, the Office for National Statistics said in London, matching the median estimate of 36 economists in a Bloomberg News survey.
Three-month implied volatility on the pound versus the euro climbed as high as 8.6 percent, the highest since June 19. The gauge ended last year at 5.9 percent.
The Bank of England last week kept its target for bond purchases at 375 billion pounds and its benchmark interest rate at 0.5 percent. Governor Mervyn King will publish the new forecasts for growth and inflation at a press conference at 10:30 a.m. in London tomorrow.
The pound has weakened 3.8 percent this year, the second- worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 2.5 percent and the dollar gained 0.3 percent.
The yen rose against all its major counterparts after an official from a G-7 nation said the group was concerned about excessive moves in Japan’s currency. Japan will be in the spotlight when the Group of 20 meets in Moscow this weekend, the official said on condition of anonymity.
The benchmark 10-year gilt yielded 2.11 percent. The price of the 1.75 percent bond due in September 2022 was at 96.91.
The U.K. Debt Management Office said it plans to sell 2.25 billion pounds of 10-year securities on Feb. 21.
U.K. government bonds handed investors a loss of 2.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.4 percent and Treasuries fell 0.8 percent.
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