The pound reached the lowest in a week against the dollar amid speculation an economic growth report will add to signs the U.K. recovery is slowing, damping the allure of sterling.
The U.K. currency dropped versus most of its 16 major peers after data last week showed retail sales declined more than economists forecast and consumer prices slipped, sapping optimism the Bank of England is moving toward raising interest rates. British government bonds were little changed after Bank of England Governor Mark Carney said the central bank will support the economic recovery.
“The positive momentum, which had been a major supportive factor for the pound, is declining,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “This is making it increasingly difficult for the U.K. data to generate positive surprises and hence generate the additional support to push pound-dollar higher.”
The pound was little changed at $1.6639 as of 4:52 p.m. London time after falling to $1.6584, the lowest level since Feb. 12. The U.K. currency declined 0.8 percent versus the dollar last week. Sterling traded at 82.58 pence per euro from 82.67 pence on Feb. 21.
Britain’s gross domestic product expanded 0.7 percent in the three months through December, in line with a Jan. 28 estimate and compared with growth of 0.8 percent in the third quarter, according to the median forecast of economists in a Bloomberg News survey before the data on Wednesday.
“We will not take risks with the recovery,” Carney said in an interview with Australian newspapers, including the Australian Financial Review, published yesterday. “We are going to set the path of monetary policy in a way that ensures that we see sustainable growth in jobs and incomes and in spending.”
Monetary Policy Committee member Martin Weale said on Feb. 20 an increase in borrowing costs from a record-low 0.5 percent may come early in 2015, while Chief Economist Spencer Dale said the previous week that investors’ bets on an increase next year and a 2 percent rate by 2016 “are reasonable.”
The pound has climbed 13 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid speculation that the strengthening recovery would prompt the Bank of England to raise interest rates earlier than it forecast. The euro climbed 6.2 percent and the dollar rose 1.4 percent.
The MPC has returned to its pre-2008 mode of data dependence, meaning “market expectations for the path of interest rates will become inherently more volatile” in reaction to data releases, according to London-based Barclays Plc fixed-income strategist Moyeen Islam. As the economy normalizes, the risks for U.K. rates “lie toward a faster and more aggressive selloff,” Islam wrote in a client note today.
“While the sugar rush of firmer data may reprice the short-term expected path of policy rates, longer-term rates have yet to reflect fully the improvement in GDP expectations over the past year,” Islam wrote. “It suggests that U.K. rates remain vulnerable to a bearish correction higher.”
The 10-year gilt yielded 2.77 percent. The price of the 2.25 percent bond maturing in September 2023 was at 95.635.
U.K. gilts returned 1.8 percent this year through Feb. 21, according to Bloomberg World Bond Indexes. German securities earned 1.9 percent and U.S. Treasuries gained 1.6 percent.