The pound fell to the lowest level versus the dollar since April as traders pushed back their expectations for interest-rate increases after the Bank of England cut its forecast for wage growth.
Sterling weakened against all of its 16 major counterparts as BOE Governor Mark Carney also reiterated his assertion that rates will only rise gradually and to a limited extent. Money-market investors moved bets on the central bank’s first increase in borrowing costs back by three months to May 2015 after BOE policy makers said they will put more weight on earnings in their assessment. A report today showed wages declined for the first time since 2009, even as unemployment fell.
“The market is busy pushing back its interest-rate hike expectations well into 2015,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “That is the key why the pound is being sold across the board. There was some expectation and pre-announcement bullishness, however, given the downward revision in wage projections and the ‘gradual and limited’ words again, the market is selling the pound.”
Sterling dropped 0.7 percent to $1.6696 at 4:19 p.m. London time and touched $1.6690, the least since April 15. The pound depreciated 0.8 percent to 80.14 pence per euro and reached 80.20 pence, the weakest level since June 30.
Average weekly earnings fell 0.2 percent in the three months through June, the first decline since 2009, the Office for National Statistics said. The U.K.’s unemployment rate dropped to 6.4 percent in the period, from 6.5 percent previously, matching the median estimate of economists in a Bloomberg News survey.
The pound has strengthened 8.8 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes, as investors brought forward their expectations for the BOE’s first interest-rate increase since 2007. Even so, it’s fallen 1.2 percent in the past month amid signs the U.K. economy is falling short of analysts’ expectations.
Forward contracts based on the sterling overnight interbank average, or Sonia, show investors pushed back bets on a 25 basis-point increase in borrowing costs to May, from February before the central bank released its Inflation Report.
In their quarterly Inflation Report published in London today, BOE policy makers said they now see annual growth in wages in the fourth quarter at about 1.25 percent, down from 2.5 percent estimated in May. The amount of slack in the economy is in the region of 1 percent of gross domestic product, the report said, compared with a previous estimate that put the mid-point at 1.25 percent.
“Uncertainty about how much slack there is has increased in recent months, in part reflecting labor-market outturns,” the BOE said. In light of this, the committee “noted the importance of monitoring the expected path of costs, particularly wages, in assessing inflationary pressures.”
Citigroup Inc.’s Economic Surprise Index for the U.K., which shows whether data beat or fell short of economists’ forecasts, was at minus 7.1 yesterday, below zero for a ninth day and down from this year’s high of 37.1 set in February.
Bank of England policy makers maintained their key interest rate at a record-low 0.5 percent last week. Minutes of the Aug. 6-7 meeting, which will show whether the decision was unanimous, will be released on Aug. 20.
U.K. government bonds advanced, with the two-year yield declining the most in more than three years.
The 10-year gilt yield fell four basis points, or 0.04 percentage point, to 2.44 percent after falling to 2.40 percent on Aug. 8, the lowest since August 2013. The 2.25 percent bond due in September 2023 rose 0.35, or 3.50 pounds per 1,000-pound face amount, to 98.47.
The two-year rate dropped 10 basis points to 0.70 percent, the steepest decline since May 3, 2011.
Gilts returned 5.7 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a gain of 6.2 percent for German securities and 3.7 percent for Treasuries.
(A previous version of this story was corrected to amend the time period for the unemployment rate.)