Pound Weakens Against Euro Before Carney Testimony, BOE

The pound depreciated against the euro, approaching its weakest level in 15 months, as Mark Carney prepared to testify to U.K. lawmakers before he becomes Bank of England governor in July.

Britain’s currency rose from near a six-month low against the dollar. Carney, who is Governor of the Bank of Canada, said last month that central banks aren’t “maxed out” on what they can do to boost their economies. He speaks before the Bank of England announces its latest policy decision. Policy makers will leave the benchmark interest rate at a record-low 0.5 percent and hold its asset-purchase target at 375 billion pounds ($587 billion), according to Bloomberg surveys of economists.

“The focus is very much on how Carney will articulate his views,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London. “We do think that he’s going to be a bit more balanced than the market has priced in. We think the market is expecting something rather dovish, so there is an opportunity for some short pound positions to be squeezed going into it.” A short position is a bet that an asset will decline.

The pound slid 0.2 percent to 86.58 pence per euro at 9:21 a.m. London time, after depreciating to 87.17 pence on Feb. 1, the weakest since October 2011. Sterling was little changed at $1.5665. It fell to $1.5631 on Feb. 5, the lowest since Aug. 10.

Investors should buy the pound against the dollar before Carney’s testimony, betting it will rise, Robson recommended.

Currency Returns

Sterling has dropped 4 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 3.2 percent and the dollar was little changed.

“Carney has more recently identified how monetary policy still has room for expansion,” London-based Citigroup foreign-exchange strategists Valentin Marinov and Josh O’Byrne wrote in a note to investors yesterday. “It could encourage the markets to price in easier policy at the BOE, with the view that tolerance of higher inflation will see the bank adding stimulus for longer. This could add to the cyclical headwinds for sterling.”

The Bank of England may also provide details about what it will do with its 6.1 billion-pound holding of 4.5 percent gilts that are due to be repaid on March 7. The securities are the first to mature since the central bank started its asset-purchase plan in March 2009.

Gilts Redemption

In September, 1.6 billion pounds of 8 percent gilts held by the central bank will mature, before 21 billion pounds next year, according to data on the Bank of England’s website.

“I think they will say that they will reinvest it in the interest of maintaining monetary conditions,” said Philip Rush, an economist at Nomura International Plc in London.

The 10-year gilt yield fell one basis point, or 0.01 percentage point, to 2.09 percent after rising to 2.17 percent on Feb. 4, the highest since April 20. The 1.75 percent bond due September 2022 rose 0.09, or 90 pence per 1,000-pound face amount, to 97.1.

Gilts handed investors a loss of 1.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.5 percent and Treasuries fell 0.8 percent.

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