Pound Falls for Second Day as Data Confirm U.K. Growth Slowdown

  • U.K. bonds post third weekly gain, longest run since August
  • Net trade has biggest ever drag on Britain's economy

The pound fell for a second day after a report confirmed U.K. economic growth slowed in the third quarter.

Sterling declined for a second week versus the dollar amid speculation the state of the economy means any interest-rate increases from the Bank of England will be gradual. BOE Governor Mark Carney said earlier this week that a low-rate environment will remain for some time. That also helped support U.K. government bonds, which posted a third week of gains. In the U.S., the Federal Reserve has raised market expectations for a boost to rates in December.

Britain’s gross domestic product expanded 0.5 percent in the three months through September, matching the initial reading from the Office for National Statistics but slower than the 0.7 percent increase in the previous quarter. Trade was the big drag on the economy, subtracting the most from the growth figures on record, though that was offset by increases in household and government spending.

The pound “has been drifting lower as we’ve seen markets getting prepared for the Fed next month, and at the same time Carney et al have been trying to push back continually the timing of rate expectations for the U.K.,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “Net trade was more of a drag than anticipated,” but resilient consumer spending and investment mean sterling shouldn’t keep falling, he said.

Buying Opportunity

The pound dropped 0.4 percent to $1.5041 at 4:45 p.m. London time, after sliding 0.2 percent on Thursday. It fell 1 percent this week, the most since Nov. 6. Sterling slipped 0.2 percent to 70.41 pence per euro, compounding a 0.5 percent weekly decline.

If the pound falls to $1.50, it would be a “reasonably attractive” level to buy at on a medium-term outlook, Stretch said. The BOE has pushed rate expectations out too far and once most investors realize this, it will provide support for the pound against the dollar, he said.

Forward contracts based on the sterling overnight index average, or Sonia, aren’t pricing in a BOE interest-rate increase until after January 2017.

Onus on Consumer

The yield on the two-year security dropped one basis point, or 0.01 percentage point, to 0.60 percent, after sliding earlier to 0.576 percent, the lowest this month. The price of the 1 percent note due September 2017 rose 0.02, or 20 pence per 1,000-pound face amount, to 100.71.

The drop in trade and the government’s failed efforts to rebalance the economy toward external demand explain why short-dated yields are falling, according to John Wraith, head of U.K. rates strategy at UBS Group AG in London.

“If the Bank of England are thinking of tightening policy, it makes it harder to do so when there’s so much onus on the domestic consumer to keep performing,” Wraith said. “The economy is going to remain dependent on the private sector domestically because we’ve got ongoing fiscal consolidation and weakness of external demand.”

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