- Sterling pares gains made after Osborne's Spending Review
- U.K. yield spread to U.S. signal a weaker pound, SocGen says
The pound’s appeal is eroding.
Options traders are the most bearish on the currency against the dollar in more than four months, while gains made after U.K. Chancellor of the Exchequer George Osborne increased the government’s forecast for growth next year on Wednesday have pared.
Bank of England Governor Mark Carney’s Nov. 24 message to lawmakers that low interest rates will remain for some time is also damping the outlook for the pound, which has depreciated against all of its Group-of-10 peers this week. Meanwhile, a referendum on Britain’s membership to the European Union, scheduled to take place before the end of 2017, will add to the reasons for investors to be cautious on sterling next year, according to Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London.
Osborne’s Spending Review also suggested a significant amount of fiscal tightening is still taking place, which will weigh on growth and by extension the U.K. currency, according to Morgan Stanley.
“The pound is becoming increasingly exposed to both domestic and political risk,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, wrote in a note. “We maintain our pound-dollar bearish medium-term view.”
Sterling fell less than 0.1 percent to $1.5125 as of 3:58 p.m. London time, after gaining 0.3 percent Wednesday. The pound was little changed at 70.21 pence per euro.
The premium for three-month contracts to sell the pound versus the dollar over those to buy widened to 0.8 percentage points Thursday, the most since July 16, according to risk-reversal prices compiled by Bloomberg.
With the yield premium on U.S. Treasury two-year notes the widest over similar-maturity U.K. government securities since 2006, there is more potential for bets on the pound weakening, said Kit Juckes, a London-based global strategist at Societe Generale SA.
Two-year U.K. gilt yields fell three basis points, or 0.03 percentage point, to 0.60 percent, while benchmark 10-year yields dropped four basis points to 1.84 percent. The 2 percent bond due in September 2025 rose 0.38, or 3.80 pounds per 1,000-pound face amount, to 101.41.