Pound Approaches 4-Month High Versus Dollar Before Fed Decision

The pound approached a four-month high against the dollar amid speculation the Federal Reserve will announce a third series of bond purchases to stimulate growth in the world’s largest economy.

Sterling held gains from the past two days versus the U.S. currency as two-thirds of economists in a Bloomberg survey said the Fed will implement more quantitative easing after its two-day meeting ends today. Gilts rose after the Bank of England said its market contacts were skeptical that improving sentiment in the euro-area would be sustained. The U.K. sold 3.5 billion pounds ($5.64 billion) of 10-year bonds.

“The dollar is under pressure going into the Fed decision and the pound could gain further if there is more QE in the U.S.,” said Melinda Burgess, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. If the Fed fails to announce more QE, “a broad risk-off move would support the dollar and bring the pound lower,” she said.

The pound rose 0.1 percent to $1.6115 at 4:23 p.m. London time after climbing to $1.6131 yesterday, the strongest since May 11. Sterling was little changed at 80.10 pence per euro.

The U.K. currency has gained 0.6 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 2.4 percent and the euro rose 2.7 percent.

‘Low Growth’

RBS predicts the pound will weaken to $1.54 by year-end due to “low growth” in the U.K. and expectations for further quantitative easing from the Bank of England, Burgess said.

Britain’s gross domestic product has contracted in the last three quarters, choked by the euro-area sovereign-debt crisis and an austerity program implemented by Chancellor of the Exchequer George Osborne.

The U.K. economy shrank 0.5 percent in the second quarter, the Office for National Statistics said Aug. 24. The Bank of England downgraded its growth forecasts last month and said the outlook was “unusually uncertain.”

“Upside potential for pound-dollar is nearing its limitations, and we expect the pound to come back under pressure in the coming months,” Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London, wrote in a note today. “Many of our market-based leading indicators for pound-dollar are already giving renewed negative signals, and the domestic U.K. fundamentals remain far from inspiring.”

The median of 44 estimates in a Bloomberg survey is for the pound to end the year at $1.55.

Gilts Gain

Ten-year gilts advanced for the first time in four days as the Bank of England said in its Quarterly Bulletin published today that “many of the fundamental challenges facing the euro area remained.”

The 10-year yield declined one basis point, or 0.01 percentage point, to 1.82 percent. The 1.75 percent bond maturing in September 2022 gained 0.115, or 1.15 pounds per 1,000-pound face amount, to 99.38.

The U.K. sold additional 10-year bonds today at an average yield of 1.825 percent. The government last auctioned the securities on July 12 at an average yield of 1.719 percent, the lowest since Bloomberg began compiling the data in 1998.

Gilts have returned 2.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2.1 percent and U.S. Treasuries rose 1.7 percent.

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