Pound Falls to Two-Week Low as Osborne Cuts U.K. Growth Outlook

George Osborne Lowers U.K. Growth Outlook
  • Chancellor George Osborne addressed U.K. lawmakers in London
  • Sterling is worst-performing G-10 currency in past month

The pound slid to a two-week low as U.K. Chancellor of the Exchequer George Osborne revised down the nation’s growth outlook in his annual budget.

The U.K. currency dropped for a third day versus the dollar as Osborne said the Office for Budget Responsibility revised its forecast for U.K. economic growth this year to 2 percent from a previous estimate of 2.4 percent, and lowered its projections out as far as 2020. The numbers are based on the assumption that Britain will stay in the European Union. The Chancellor had recently warned that more savings, including public-sector spending cuts, will be required as economic risks intensify.

Against this backdrop, investors are further delaying their calls for when the Bank of England will increase interest rates. The BOE is scheduled to announce its latest policy decision on Thursday.

Sterling is the worst-performing Group-of-10 currency over the past month amid concern that Britain will quit the EU at a June 23 referendum, threatening trade and economic stability, and keeping interest rates at a record low for longer. This risk was also increasing the chance of a BOE rate cut in 2016, a monthly Bloomberg survey of analysts showed.

“Sterling sold off on the downward revision to U.K. growth,” said Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd. “The GDP forecasts beyond 2016 are looking more confident, so I would expect limited downside” in the pound, he said. The U.K. currency could go lower this week “on a double fiscal and monetary hit, with the budget and the MPC,” he said.

The pound fell 0.3 percent to $1.4107 as of 4:16 p.m. London time, having touched $1.4053, the lowest since March 3. The U.K. currency was little changed at 78.51 pence per euro.

Deflation Threat

Central banks globally are turning to extraordinary stimulus measures to shore up their economies and ward off deflation. While global conditions have improved since last month, “the domestic picture looks softer” and could prompt the BOE’s Monetary Policy Committee to sound “dovish” on Thursday, according to Citigroup Inc.’s London-based foreign-exchange strategist Josh O’Byrne.

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“We don’t expect a BOE bombshell, but there are dovish risks,” O’Byrne wrote in a note to clients and recommended betting on the pound’s decline. With U.K. data proving to be “disappointing” and markets pricing out any chance of a BOE rate increase for the next couple of years, “the MPC could serve a reminder policy isn’t ready to become a sterling positive,” O’Byrne said in the note.

The pound stayed lower versus the dollar as separate reports Wednesday showed the U.K. unemployment rate held at a decade-low of 5.1 percent in the three months through January, while weekly earnings growth picked up to 2.2 percent in the same period, from 2 percent a month earlier.

Rate Outlook

Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a 25 basis-point increase to the BOE’s official rate until 2017 at the earliest. Economists in a monthly Bloomberg survey put the likelihood of a cut to the 0.5 percent benchmark rate this year at 23 percent, up from just 10 percent in February.

U.K. 10-year government bonds rose for a third day, with the benchmark gilt yield falling two basis points, or 0.02 percentage point, to 1.51 percent. The 2 percent bond due in September 2025 gained 0.215, or 2.15 pounds per 1,000-pound face amount, to 104.285.

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