Pound Weakens to Two-Month Low as Inflation Slows; Gilts Advance

Pound Declines to Weakest Level in Two Months as Inflation Slows
The pound dropped 0.8 percent to $1.5865 at 9:42 a.m. London time after falling to $1.5855, the lowest since Sept. 13. Photographer: Matthew Lloyd/Bloomberg

The pound fell to a two-month low against the dollar after a government report showed U.K. inflation slowed more in October than economists forecast, damping bets the central bank will raise interest rates.

Sterling weakened for a third day versus the euro before the Bank of England led by Governor Mark Carney publishes new economic forecasts in its quarterly Inflation Report tomorrow. Policy makers have pledged to keep interest rates at a record low as long as inflation expectations remain anchored to their 2 percent goal. Short-sterling futures contracts advanced, a sign investors were paring bets on higher interbank borrowing costs. U.K. government bonds rose.

“Interest-rate expectations are going to be pared back after the inflation data,” said David Bloom, global head of currency strategy at HSBC Holdings Plc in London. “This has put sterling on the back foot. Mr. Carney must be smiling. He hasn’t had anything going his way for a long time.”

The pound dropped 0.3 percent to $1.5943 at 4:19 p.m. London time after falling to $1.5855, the lowest level since Sept. 13. Sterling slipped 0.7 percent to 84.39 pence per euro, extending its three-day decline to 1.2 percent.

The U.K. currency will weaken toward $1.55 by year-end, HSBC’s Bloom said. Sterling will end 2013 at $1.59, according to the median estimate of analysts in a Bloomberg News survey.

‘Technically Significant’

“The price action is technically significant,” Brown Brothers Harriman & Co. analysts led by global head of currency strategy Marc Chandler in New York, wrote in a note to clients.

The pound may decline toward its 200-day moving average at $1.5496, after falling below the mid-October low of $1.5894, the strategists said.

Annual consumer-price inflation slowed to 2.2 percent in October from 2.7 percent in the previous month, the Office for National Statistics said in London. That’s less than the 2.5 percent pace predicted by economists in a Bloomberg survey. A separate report from the Royal Institution of Chartered Surveyors showed a gauge of house prices climbed to the highest since June 2002.

The implied yield on the short sterling contract expiring in December 2014 fell four basis points, or 0.04 percentage point, to 0.78 percent.

The Bank of England left its asset-purchase target at 375 billion pounds on Nov. 7, as predicted by all 46 analysts in a Bloomberg survey. Officials 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.

Recovery Strengthens

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

The pound has strengthened 3.5 percent in the past three months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 1.3 percent and the dollar rose 0.2 percent.

The yield on the 10-year gilt fell one basis point to 2.80 percent after rising to 2.83 percent, the highest level since Oct. 16. The 2.25 percent bond due September 2023 climbed 0.055, or 55 pence per 1,000-pound face amount, to 95.315.

The extra yield investors demand to hold 10-year gilts instead of similar-maturity German bunds narrowed four basis points to 1.01 percentage points after expanding to 1.05 percentage points yesterday, the widest since 2005, according to closing-price data compiled by Bloomberg.

The U.K. plans to sell 3.75 billion pounds of 2.25 percent bonds due in September 2023 on Nov. 19 and 4.75 billion pounds of 1.75 percent securities maturing in July 2019 on Nov. 21, the Debt Management Office said today.

Gilts handed investors a loss of 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.4 percent and U.S. Treasuries declined 2.7 percent.

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