Pound Falls Before Bank of England Inflation Report; Gilts Gain

The pound fell for a fourth day against the dollar before the Bank of England’s latest growth and inflation projections this week amid speculation the report will provide room for further asset purchases to boost growth.

Ten-year gilts advanced for a second day as European finance chiefs meet to discuss a program to maintain Greek solvency. Sterling reached a two-month low against the greenback as investors await the central bank’s quarterly report, due in two days. The Bank of England refrained from adding more stimulus at its most recent policy meeting, minutes from which are due on Nov. 21. Other reports to be released this week include employment and retail sales data.

“Sterling is under pressure because data this week is likely to suggest there are challenges ahead for the U.K. economy,” said Ian Stannard, the head of European currency strategy at Morgan Stanley in London. “Also, in the previous report, the Bank of England started to talk about the negative impact of the pound strength in the economy. It’s interesting to watch if it continues to toughen its language on sterling. If it does, sterling could weaken further.”

The pound slid 0.2 percent to 80.11 pence per euro at 5:01 p.m. London time. It dropped 0.2 percent to $1.5869, after touching $1.5865, the weakest level since Sept. 5. Sterling declined 0.2 percent to 126.05 yen. The U.K. currency depreciated the most against the New Zealand dollar, trading 0.6 percent lower at 51.54 pence.

BOE Pause

The pound lost 2.2 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 2.5 percent and the dollar dropped 0.8 percent.

The 10-year gilt yield slid two basis points, or 0.02 percentage point, to 1.72 percent. The 1.75 percent bond due September 2022 rose 0.17, or 1.70 pounds per 1,000-pound face amount, to 100.31. Two-year yields were little changed at 0.24 percent.

“Despite the Bank of England’s pause, we think another round of quantitative easing can’t be ruled out, especially if the economic outlook deteriorates,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “That possibility and the renewed concern about Greece will underpin high-quality government bonds including U.K. gilts.”

King Comments

Economists predict a report tomorrow will show consumer prices rose 2.4 percent in October from the year before. Retail prices climbed 0.2 percent last month from September, according to another survey.

The yield on 10-year gilts fell to 1.67 percent on Nov. 9, the lowest in two months, as the Bank of England said it will transfer income from bonds it holds under its asset-buying program to the Treasury.

Governor Mervyn King said the move equates to an easing of monetary conditions. The Treasury will use the money to reduce the stock of debt, lowering the amount of gilts held by the private sector and increasing the amount of money in the economy, King said in a letter to Chancellor of the Exchequer George Osborne published on their websites on Nov. 9.

Gilts returned 3.4 percent this year through the end of last week, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 4 percent and U.S. Treasuries earned 2.7 percent.

Sterling may extend declines to a 10-week low against the dollar should it drop through its 200-day moving average, Credit Suisse Group AG said, citing trading patterns.

The pound has “broken to a fresh lower low, and is now set to test the 78.6 percent retracement” of its advance from Aug. 28 to Sept. 21, according to technical strategist Cilline Bain in London, referring to Fibonacci analysis.

“We continue to be bearish” on the pound versus the dollar, Bain said. “It continues to trade in a steady downtrend. The market is probably going to have a look at that 200-day moving average in the next 48 hours.” The 200-day moving average was at $1.5851, according to data compiled by Bloomberg.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE