Pound Drops Most in Two Months Against Euro Before Carney Speech

The pound posted its biggest weekly slide versus the euro since May 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 snapped a two-week rally against the 17-nation currency after a euro-area report yesterday showed consumer confidence increased more in August than analysts estimated. The pound also dropped for the first time in three weeks against the dollar. U.K. government bonds were little changed this week after yields climbed a two-year high. Carney is scheduled to speak in Nottingham, England, on Wednesday.

“It’s been a tough week for the pound,” said Daragh Maher, a foreign-exchange strategist at HSBC Holdings Plc in London. “There’s a little bit of nervousness ahead of Mark Carney next week that he may sound still quite dovish.”

The pound depreciated 0.8 percent this week to 85.97 pence per euro at 5 p.m. London time yesterday, the steepest decline since the period ended May 24. Sterling fell 0.4 percent to $1.5575 after gaining 2.2 percent in the previous two weeks.

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

Short-sterling futures declined, indicating investors are raising bets on higher interest rates, after data yesterday showed U.K. gross domestic product accelerated in the three months through June. GDP increased 0.7 percent from the first quarter, when it rose 0.3 percent.

Rates Outlook

The implied yield on the short-sterling contract expiring in September 2016 increased three basis points, or 0.03 percentage point, this week to 2.23 percent.

Carney has sought to underpin the recovery by introducing forward guidance to quell investor speculation on higher borrowing costs. Policy makers left their main interest rate at 0.5 percent and maintained the asset-purchase target at 375 billion pounds at a meeting ended Aug. 1.

A GfK NOP Ltd. report scheduled for Friday will show consumer confidence improved for a fourth month in August, according to a Bloomberg News survey of 19 economists.

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 10-year gilt yield was little changed, ending the week at 2.71 percent. The price of the 1.75 percent security due in September 2022 was 92.375. The rate climbed to 2.76 percent on Aug. 22, the highest since Aug. 8, 2011.

U.K. government bonds lost 4 percent in the past three months through Aug. 22. They underperformed Treasuries’ 3.4 percent decline and German securities, which slid 2.3 percent, according to Bloomberg World Bond Indexes.

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

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

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