Pound's Prospects Seen Torn Between ECB, Fed as Policies Diverge

  • Sterling has fallen against both dollar and euro this week
  • ECB meets next week while Fed Chair Janet Yellen will speak

The pound’s fortunes are likely to diverge next week, pulled higher by the European Central Bank and dragged lower by the Federal Reserve.

The U.K. currency has weakened against both the dollar and euro in the past week, as Bank of England Governor Mark Carney emphasized that eventual interest-rate increases will be gradual, while data confirmed the pace of economic growth in the nation slowed in the third quarter. In the next week, currency traders may be more likely to take their cues from elsewhere, as the ECB meets amid speculation it will boost stimulus.

The pound will strengthen against the euro into the end of the year, said Josh O’Byrne, a London-based currency strategist at Citigroup Inc. The “raised stakes” on ECB easing mean there’s potential for policy makers to over-deliver, and so he favors bets the euro will fall.

The pound has dropped more than 4 percent against the dollar since the middle of 2015 amid concern that U.K. economic growth is slowing and will weigh on the prospects for higher interest rates. Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a BOE interest-rate increase until after January 2017.

Meanwhile, the probability the Fed will increase its benchmark by its Dec. 15-16 meeting is 74 percent, according to futures data compiled by Bloomberg. Fed Chair Janet Yellen is scheduled to testify to a congressional Joint Economic Committee on Dec. 3, and employment data due the next day will show further gains in the U.S. labor market, economists surveyed by Bloomberg forecast.

“The bias will be for cable to weaken,” Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA, said referring to the pound-dollar exchange rate. “If Yellen doesn’t put the brakes on this dollar-buying frenzy there will be problems ahead. Plus, if the ECB overdoes it on Thursday and the euro plummets, other central banks” including the BOE “will have to respond,” he said.

The pound dropped 1 percent in the week to $1.5036 as of 5:30 p.m. London time on Friday, falling for a second week. Sterling slipped 0.6 percent 70.50 pence per euro, the first weekly decline since Nov. 6. The U.K. currency depreciated against all of its Group-of-10 peers except the Swiss franc.

Sterling will probably drop below $1.50 next week, Santander’s Bennett said. It will appreciate to near 69 pence per euro in a week, Citi’s O’Byrne said.

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. Data next week will show services activity expanded at almost the same pace in November from the previous month, according to the median forecast of economists in a Bloomberg survey.

Government bonds advanced for a third week. Benchmark 10-year yields dropped six basis points, or 0.06 percentage point, to 1.82 percent. The 2 percent bond due in September 2025 rose 0.52, or 5.20 pounds per 1,000-pound face amount, to 101.64.

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