The pound weakened for the first time in four days against the dollar as yields on gilts fell to an eight-week low relative to those on U.S. Treasuries.
The spread between the 10-year Treasury and similar-maturity gilts rose to its widest since April on a closing-market basis, dimming the relative attractiveness of the pound. Benchmark U.S. bonds had earlier reached an eight-month high that underpinned the dollar as investors speculated borrowing costs in the U.S. will increase before those in the U.K.
“I am not particularly confident on sterling,” said Neil Mellor, a London-based senior currency strategist at Bank of New York Mellon Corp. “The dollar will reassert itself as the U.S. Federal Reserve is one of the few central banks that will be raising interest rates within the next year.”
Sterling fell 0.3 percent to $1.5491 as of 5:20 p.m. London time, after gaining 1.7 percent over the previous three days. One-week volatility for the pound versus the dollar climbed 1.53 percentage points to 11.10 percent, having reached 12.39 percent earlier, the highest level since May 8. The U.K. currency strengthened 0.6 percent to 72.51 pence per euro.
The premium investors demand to hold 10-year Treasuries instead of similar-maturity U.K. government bonds was 37 basis points, or 0.37 percentage point, its highest level in almost two months.
Markets are pricing in a 25 basis-point interest rate increase by the Bank of England in August 2016, according to Sonia forward contracts, while Fed officials will tighten policy in about six months, according to a Morgan Stanley index.
Recent U.K. economic data has been mixed, and investors are finding it increasingly difficult to pinpoint when the BOE will increase interest rates from its historic low of 0.50 percent.
BOE Governor Mark Carney gave few hints on central-bank policy at the annual Mansion House speech on Wednesday in London.
Benchmark 10-year gilt yields fell eight basis points to 2.05 percent. The 5 percent security due in March 2025 advanced 0.805, or 8.05 pounds per 1,000-pound face amount, to 125.940.
“There’s been a little bit of a disappointment from Carney’s speech yesterday,” said Michael Sneyd, a foreign-exchange strategist at BNP Paribas SA in London. There were some expectations that “he could deliver a slightly more hawkish message but to not mention monetary policy at all was a bit of a disappointment,” he said.