Pound Falls for Second Day Before Inflation Report; Gilts Drop

The pound weakened for a second day against the euro and dollar before the Bank of England publishes new forecasts in its quarterly Inflation Report this week.

The U.K. currency declined versus most of its 16 major counterparts. Governor Mark Carney will present the new economic projections at his second Inflation Report on Wednesday with Goldman Sachs Group Inc. among those forecasting the central bank will improve its outlook. U.K. government bonds fell, increasing the extra yield investors demand to hold the nation’s 10-year gilts instead of German bunds to the widest since 2005.

“The pound has come off a little bit,” said Paul Robson, foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. “People may be wondering if a more positive Inflation Report is now fully priced and they may have come in to this week with a more cautious outlook.”

The pound declined 0.5 percent to 83.90 pence per euro at 3:54 p.m. London time after appreciating 1.5 percent last week, the most since the period ended April 26. Sterling dropped 0.2 percent to $1.5982 after gaining 0.6 percent last week.

The Bank of England’s Monetary Policy Committee left its asset-purchase target at 375 billion pounds on Nov. 7, as predicted by all 46 analysts in a Bloomberg News survey. Officials also kept the benchmark interest rate at 0.5 percent. The central bank has said it will keep borrowing costs at a record low until unemployment, currently at 7.7 percent, falls below 7 percent.

‘Well Supported’

In the previous Inflation Report in August, officials said unemployment was unlikely to decline to the 7 percent threshold for considering interest-rate increases until late 2016. Since then, the recovery has strengthened with services, construction and industrial production data all beating economists forecasts.

“Sterling should remain relatively well supported,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “The projections and the press briefing from the BOE will be very important. The stronger growth outlook should keep sterling supported.”

Investors should buy the pound against the euro, Australian dollar or yen, Stretch said. Sterling will end the year at 83 pence per euro, he predicted.

The pound has strengthened 3.6 percent in the past three months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 0.7 percent and the dollar rose 0.2 percent.

Gilts Decline

The 10-year gilt yield climbed four basis points, or 0.04 percentage point, to 2.80 percent. The 2.25 percent bond due in September 2023 fell 0.295, or 2.95 pounds per 1,000-pound face amount, to 95.285. The yield jumped 12 basis points last week.

The extra yield investors demand to hold 10-year gilts instead of similar-maturity German bunds expanded four basis points to 1.06 percentage points. That’s the widest since 2005, according to closing-price data compiled by Bloomberg.

Investors should sell 10-year gilts while buying Germany’s 2 percent security due August 2023, betting the yield difference will widen to 1.4 percentage points, Jamie Searle, a strategist at Citigroup Inc. in London, wrote today in a note to clients.

Gilts lost 3.4 percent this year through Nov. 8, according to Bloomberg World Bond Indexes. German bonds dropped 1.4 percent and U.S. Treasuries declined 2.7 percent.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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

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