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Pound Loses to Euro in Longest Run Since April Amid Global Risks

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The pound declined for a third week against the euro, the longest run of losses since April, as risk-averse investors bought the 19-nation shared currency.

Sterling fell to its weakest level since mid-June amid speculation the Bank of England won’t raise interest rates until the middle of next year. Concerns Chinese growth is weakening, together with a decline in European stocks, prompted investors to unwind short positions they’d previously taken out to bet on a weaker euro.

“There has been a general reduction in risk and risk taking,” said Hamish Pepper, a foreign-exchange strategist at Barclays Plc in London.

Betting on a euro decline has been a key trade for many investors, and so “the idea of reducing risk in an indiscriminate way means buying euros,” Pepper said. As for the BOE, “nothing in our minds suggests they’re close to wanting to hike rates,” he said.

The pound weakened 1 percent to 72.37 pence per euro as of 4:46 p.m. London time, extending this week’s decline to 1.9 percent. Sterling was little changed on the day, and up 0.3 percent in the week, at $1.5683.

The euro climbed 2.2 percent versus the dollar this week as the Stoxx Europe 600 Index sank 6.5 percent, poised for a so-called correction.

China Slowdown

The weakest Chinese manufacturing data since the global financial crisis stoked concern a slowdown in the world’s second-biggest economy is deepening, particularly after last week’s devaluation of the yuan.

“Increasingly, the euro is a funding currency,” said Steven Saywell, London-based global head of foreign-exchange strategy at BNP Paribas. “In periods of risk-off, it tends to appreciate. The reason for that is the market funds carry trades in euros, and when it needs to unwind those carry trades it buys the euro back.”

In carry trades, investors borrow in a currency with low interest rates to purchase a higher-yielding asset. The deals tend to depress the funding currency.

Sonia Signal

Forward contracts based on the sterling overnight index average, or Sonia, signal a 25 basis-point increase to the BOE’s 0.5 percent main rate in August 2016.

U.K. government bonds rose, with 10-year yields dropping by the most in more than a month this week amid a global rally in fixed income.

Benchmark 10-year gilt yields fell 19 basis points, or 0.19 percentage point, to 1.69 percent. The 5 percent security due in March 2025 rose 1.86, or 18.60 pounds per 1,000-pound face amount, to 129.07.

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