The pound approached the weakest level in 18 months versus the dollar as the prospect of inflation slowing below 1 percent boosted speculation the Bank of England will keep interest rates at a record low for longer.
A report tomorrow will show U.K. consumer prices rose 0.7 percent in December from a year earlier, the least since 2002 and dipping further below the central bank’s 2 percent target, according to the median forecast of analysts in a Bloomberg News survey. Sterling held a three-day gain versus the euro. U.K. government bonds were little changed with the 30-year gilt yield about two basis points from the lowest level on record.
“Markets are mindful of the upcoming data points, particularly those CPI numbers,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “The Bank of England is going nowhere fast. Sterling looks like it’s going to remain under some pressure.”
The pound fell 0.3 percent to $1.5119 at 10:37 a.m. London time after sliding to $1.5035 on Jan. 8, the weakest level since July 2013. The U.K. currency was little changed at 78.05 pence per euro after strengthening 0.5 percent over the previous three days.
Forward contracts show investors are betting the sterling overnight interbank average, or Sonia, will be at 0.54 percent at the BOE’s November policy meeting, from 0.43 percent this month, and compared with the central bank’s official borrowing rate of 0.5 percent.
The U.K. central bank may raise interest rates sooner than the market is currently pricing, according to CIBC’s Stretch, who sees a “realistic prospect” of policy makers acting in August. He forecasts the pound will drop as low as $1.45 by mid-year before a moderate recovery to $1.53 by December.
The 30-year gilt yielded 2.33 percent after falling to 2.32 percent on Jan. 6, the least since Bloomberg began collecting the data in 1996. The price of the 3.25 percent bond due in January 2044 was at 119.265 percent of face amount.
Gilts returned 16 percent over the year through Jan. 9, outperforming German and U.S. government securities, according to Bloomberg World Bond Indexes.