Pound Weakens Second Day Versus Euro Before Carney Policy Speech

The pound weakened for a second day versus the euro as investors bet Bank of England governor Mark Carney will use a speech next week to affirm his intention to hold borrowing costs at an all-time low.

Sterling headed for its first weekly drop in three against the dollar. It was set for the biggest weekly slump against the euro since May after data showed euro-area consumer confidence increased more than analysts estimated in August. Benchmark 10-year gilt yields were little changed after approaching the highest level in two years as a report showed the U.K. economy expanded more than initially estimated in second quarter. Carney is set to speak in Nottingham, England, on Aug. 28.

Carney “will of course defend forward guidance and try to anchor market expectations, so the anticipated course would be a downside move in sterling,” said Geoffrey Yu, senior foreign-exchange strategist at UBS AG in London. “If anything, the communication will be much stronger.”

The pound depreciated 0.4 percent to 85.98 pence per euro at 4:34 p.m. London time, extending this week’s decline to 0.8 percent. Sterling was little changed at $1.5573 after falling 0.5 percent yesterday, the steepest drop since Aug. 1. It has slipped 0.3 percent this week.

The U.K. currency weakened the most in three weeks against the dollar yesterday after Bank of England policy maker Martin Weale said it may be “sensible” for the central bank to extend asset purchases in some circumstances.

Carney said when unveiling his new forward-guidance framework on Aug. 7 that policy makers plan to hold the benchmark interest rate at a record-low 0.5 percent until the unemployment rate falls to 7 percent, which the central bank doesn’t see happening until the fourth quarter of 2016.

Output Increases

Indexes of manufacturing, services and construction output all improved in July and house prices rose amid the strongest property market since the financial crisis.

Sterling gained 6 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro appreciated 4.6 percent and the dollar rose 2.9 percent.

Strategists at Barclays Plc (BARC) expect the central-bank governor will use his speech next week to reaffirm his intention to hold borrowing costs at an all-time low.

“Carney may offer little new guidance and simply echo the message presented in the quarterly Inflation Report,” strategists at Barclays including Chris Walker in London wrote in a note to clients. “However, we would hedge for the risk that he uses the occasion to talk down rates more aggressively.”

The 10-year gilt yielded 2.70 percent after climbing to 2.76 percent yesterday, the highest level since Aug. 8, 2011. The price of the 1.75 percent security due in September 2022 was 92.42. The rate earlier climbed to 2.759 percent.

Gilts lost investors 4.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.5 percent and Treasuries declined 3.9 percent.

To contact the reporters on this story: Morgane Lapeyre in London at mlapeyre@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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

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