Pound Weakens as Prospect of BOE Policy Tightening Seen Delayed

  • Sterling touches two-week low versus dollar, falls for 4th day
  • Forward contracts signal fading BOE rate-increase bets in '16

The pound fell to a two-week low against the dollar as investors speculated on further delays in an interest-rate increase by the Bank of England.

Sterling slid for the fourth day versus the U.S. currency as the Federal Reserve’s decision last week to keep its benchmark policy rate on hold at record lows prompted investors to push back the date of when the BOE would tighten its monetary policy for the first time since 2007.

The pound weakened against most of its 16 major peers, receding from the strongest level in a month versus the euro. Comments on the global economic turmoil from the Fed last week have fueled speculation that the BOE will keep policy as accommodative well into next year. BOE Deputy Governor Ben Broadbent is due to speak on Wednesday, making him the eighth of the central bank’s nine key officials to have made public comments in a week as investors search for clarity on the central bank’s policy path.

“The market sees the Fed’s tightening cycle and the BOE’s as highly synchronized,” said Petr Krpata, a foreign-exchange strategist at ING Groep NV in London. “Everyone thinks the Fed must be the first mover to allow the BOE to follow. So when markets are repricing the Fed, and pushing out the expectations for the first rate hike, a similar thing is happening with the BOE.”

The pound fell 0.9 percent to $1.5233 as of 4:22 p.m. London time, and reached $1.5221, the least since Sept. 7. Sterling depreciated 1.2 percent to 73.23 pence per euro, its steepest decline since Sept. 1. The U.K. currency touched 71.97 pence on Tuesday, the strongest since Aug. 21.

Pound-dollar price graph
Pound-dollar price graph

ING’s Krpata added that comments from the Broadbent will be closely watched as he might be mindful of the “external environment like China.” He added that $1.5160 is the next key support level to the downside in sterling.

Forward contracts based on the sterling overnight index average, or Sonia, show traders have pushed back bets on a quarter-point increase to the BOE’s 0.5 percent main rate until beyond November 2016. As recently as Aug. 17, they were pricing in a move next August.

Sterling depreciated against the euro, which rose after European Central Bank Governing Council member Ewald Nowotny said he was wary of increasing the central-bank’s stimulus any time soon.

“Monetary policy should be a steady-hand policy. We shouldn’t act in a too-active way,” Nowotny said in a Bloomberg Television interview in Vienna on Wednesday.

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