Pound Falls Against Dollar as Gilts Rise Before Forward Guidance

The pound fell for a second day against the dollar and government bonds rose before Bank of England Governor Mark Carney gives a review of implementing forward guidance to signal the direction of U.K. interest rates.

Sterling weakened against most of its 16 major counterparts before Carney presents the central bank’s assessment of the use of thresholds along with the quarterly Inflation Report, and will also hold a press conference in London. The Federal Reserve has pledged to keep its short-term interest-rate target near zero at least until U.S. unemployment falls to 6.5 percent and as long as forecast inflation isn’t above 2.5 percent.

“Realistically he’ll probably reiterate that interest rates will be held low until growth picks up and inflation stabilizes around the 2 percent target,” said Harry Adams, head of trading at Argentex LLP, currency-advisory company in London. “The more he says, the more he leaves himself open and the more the pound will move. He could take the Fed approach by linking policy to unemployment rate. This would at least give investors some sort of barometer.”

The pound dropped 0.2 percent to $1.5315 as of 9:55 a.m. London time after weakening 0.1 percent yesterday. Sterling declined 0.1 percent to 86.76 pence per euro after depreciating to 87.70 pence on Aug. 1, the weakest level since March 12.

The central bank will publish its Inflation Report at 10:30 a.m. in London, followed by Carney’s press conference.

Growth Signs

Britain’s industrial production rose more in June than economists forecast, data showed yesterday, while a report on August 5 showed services output expanded at the fastest pace in six years last month.

Signs the economic recovery is being sustained mean it’s “a strange backdrop to the introduction of forward guidance on monetary policy,” Kit Juckes, a global strategist at Societe Generale SA in London, wrote today in a note to clients. “Telling the people of the U.K. that rates will stay low for a long time won’t have so much effect. Rate expectations are already low.”

The 10-year gilt yield fell one basis point, or 0.01 percentage point, to 2.47 percent. The 1.75 percent bond due September 2022 rose 0.1, or 1 pound per 1,000-pound face amount, to 94.21. The yield climbed to 2.51 percent yesterday, the highest since July 5.

The implied yield on the short sterling contract expiring in September 2014 slid four basis points to 0.67 percent.

‘Not Warranted’

Carney has already taken steps to curb higher borrowing costs. The central bank said in a statement after its July 4 meeting that the “implied rise in the expected future path of bank rate was not warranted” by economic developments. The pound fell 0.6 percent versus the euro that day.

Carney will align Bank of England policy closer to the Fed by linking guidance on interest rates to economic developments, according to a Bloomberg News survey of 43 economists published last month. Twenty-three said he would opt to link a pledge on loose policy to economic data, while 18 said he will use a period of time.

The pound has declined 1.7 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro strengthened 5.9 percent and the dollar gained 5 percent.

U.K. government bonds have lost investors 3.4 percent in 2013, according to Bloomberg World Bond Indexes. Treasuries dropped 2.8 percent and German bonds declined 1.5 percent.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.