Pound Stuck in Limbo as Inflation Holds Near Zero for 10th Month

  • Sterling touches seven-week low against euro Tuesday
  • U.K. consumer prices grew annual 0.1 percent in November

The first increase in U.K. consumer prices in four months failed to spur the pound, which found itself hemmed in by market events in the U.S. and Europe.

Sterling fell against the dollar and was little changed versus the euro, after touching a seven-week low, as investors favored stocks amid speculation the Federal Reserve will raise interest rates Wednesday. A revival in risk appetite funneled money away from fixed-income and into equities.

Consumer prices rose at an annual 0.1 percent rate in November, matching analyst estimates. They last rose in July. The pace of inflation hasn’t exceeded 0.1 percent since January, and Bank of England officials have been reluctant to tighten policy with the rate so far below the central bank’s 2 percent target. 

“With the focus on the U.S. this week, we would have needed a more significant difference to the consensus forecasts to have much of an impact” on the pound, said John Goldie, a London-based senior dealer at Argentex LLP. “Sterling seems to be subject to the external forces pushing it up and down.”

The Federal Reserve will raise U.S. interest rates for the first time in almost a decade on Wednesday, according to all but three of the 102 economists in a Bloomberg survey.

‘Choppy’ Market

Argentex’s Goldie said he sees markets remaining “choppy” until year-end, with the direction for the U.K. currency being taken from the U.S. and the future monetary policy path taken by the Fed.

The pound was at 72.63 pence per euro as of 4:18 p.m. London time, after touching 73.02 pence, the weakest level since Oct. 22. Sterling fell 0.6 percent to $1.5051, adding to its 0.5 percent decline Monday. The euro fell 0.6 percent to $1.0928.

“Investors want to remain relatively squared ahead of the Fed verdict and this explains to me why euro-dollar has receded in the course of today and cable has also gradually retreated from early peaks above 1.5160,” Roberto Mialich, a senior foreign-exchange strategist at UniCredit SpA in Milan, said referring to the pound-dollar exchange rate.

BOE Deputy Governor for Markets and Banking Minouche Shafik said on Monday that wage pressures weren’t strong enough to justify an increase in interest rates. While saying she will “proceed with caution,” rates probably will rise more quickly than the market currently implies, she said.

Pound Bear

Morgan Stanley strategists recommend continuing to bet on the pound’s decline. BOE policy makers are likely to remain dovish in light of the drop in oil prices and the impact on the U.K. economy of higher volatility and uncertainty in emerging markets, analysts led by London-based Hans Redeker wrote in a note Tuesday.

U.K. government bonds declined with German bunds. Traders were shunning haven assets as European stock prices rose for the first time in six days and oil futures climbed. The yield on 10-year gilts rose 11 basis points, or 0.11 percentage point, to 1.95 percent. The 2 percent security due in September 2025 fell 0.96, or 9.60 pounds per 1,000-pound face amount, to 100.455.

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