Pound Slides Most Since July Versus Dollar on Fed Outlook

The pound posted its biggest weekly decline versus the dollar since July as signs the U.S. economy is strengthening fueled bets the Federal Reserve will slow stimulus that tends to debase the greenback.

Sterling fell for a second week against the U.S. currency as a gauge of whether U.K. data is beating forecasts dropped to the lowest level since June. Gauges of consumer sentiment and manufacturing output both fell short of economists’ estimates. The pound strengthened the most in five weeks versus the euro amid speculation the European Central Bank will cut interest rates as soon as next week to revive growth. U.K. gilts dropped, with 10-year yields rising from a two-month low.

“The pound is down against a strong dollar and winning against a weak euro,” said Adam Cole, head of Group-of-10 currency strategy at Royal Bank of Canada in London. “It’s not to do with its own fundamentals. There’s better dollar sentiment on the Fed outlook and this week there’s been a big shift in sentiment against the euro with people pricing in ECB rate cuts.”

The pound fell 1.5 percent this week to $1.5925 at 5 p.m. in London yesterday, the steepest drop since the period ended July 5. Sterling gained 0.8 percent to 84.69 pence per euro, the biggest increase since Sept. 27.

Britain’s currency will appreciate to 82 pence per euro by the end of the year as the U.K. economy outperforms that of the euro region, RBC’s Cole predicted. That would be the strongest since January.

Surprise Index

The Citigroup U.K. Economic Surprise Index fell for a seventh day to 17.7 yesterday, the lowest since June 17. The gauge, which shows whether data beat or fell short of economists’ forecasts, climbed to this year’s high of 113.30 on Aug. 19.

GfK NOP Ltd. said on Oct. 31 its index of consumer sentiment dropped to minus 11 last month from minus 10 in September. Analysts had forecast an increase to minus 8. A gauge of manufacturing, based on a survey of purchasing managers, fell to 56 from a revised 56.3 in September, Markit Economics said yesterday, less than a forecast 56.4.

The U.S. economy shows signs of “underlying strength,” the Fed said on Oct. 30, fueling speculation it will begin reducing its $85 billion monthly bond-buying stimulus sooner than previously expected.

The pound has fallen 1.1 percent in the past month, the worst performer after Sweden’s krona of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.8 percent and the euro rose 0.5 percent.

Rate Forecasts

Sterling strengthened against the euro after Bank of America Corp., UBS AG and Royal Bank of Scotland Group Plc all predicted the ECB will cut its main refinancing rate to a record-low 0.25 percent at its Nov. 7 policy meeting.

Bank of England policy makers meeting on Nov. 7 will leave the key interest rate at 0.5 percent and the asset-purchase target at 375 billion pounds, according to Bloomberg surveys of economists.

The U.K. 10-year gilt yield added three basis points, or 0.03 percentage point, this week to 2.65 percent. The rate fell to 2.52 percent on Oct. 31, the lowest since Aug. 13. The 2.25 percent bond due in September 2023 dropped 0.27, or 2.70 pounds per 1,000-pound face amount, to 96.58.

Gilts returned 0.8 percent in October, according to Bloomberg World Bond Indexes. Treasuries and German bonds both gained 0.5 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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

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