Pound Reaches One-Week Low Against Euro After U.K. GDP Report
The pound fell to a one-week low versus the euro after a government report showed economic growth matched analyst estimates last quarter, damping bets the Bank of England is moving closer to ending its accommodative policy.
Sterling was little changed against the dollar as investors turned their focus to the central bank’s next policy meeting on Aug. 1 and its Inflation Report on Aug. 7. Pacific Investment Management Co. recommended investors should bet Britain’s interest rates will stay lower for longer. U.K. government bonds were little changed after 10-year yields reached the highest level in two weeks.
“The numbers were in line and there are no big surprises,” said Kathleen Brooks, a research director in London at Forex.com, a unit of online currency-trading company Gain Capital Holdings Inc. (GCAP) “The big news is going to be the Bank of England. In our view they are going to keep rates very low for a long time and they want to keep gilt yields subdued. That could potentially cap the pound’s gains.”
The pound weakened 0.1 percent to 86.30 pence per euro at 4:32 p.m. London time after depreciating to 85.88 pence, the least since July 18. The U.K. currency strengthened 0.1 percent to $1.5333.
The U.K. economy expanded 0.6 percent in the second quarter after growing 0.3 percent in the previous three months, the Office for National Statistics said in London. That matched the median estimate of analysts in a Bloomberg survey.
Central bank Governor Mark Carney will present analysis on releasing forward guidance on the future path of interest rates at next month’s central-bank meeting.
The Monetary Policy Committee will keep its bond-purchase target at 375 billion pounds and leave interest rates at a record-low 0.5 percent at the gathering, according to Bloomberg surveys of economists. Two officials ended calls for more quantitative easing at this month’s meeting.
“Risks for the pound remain in place going into the BOE meeting and Inflation Report,” Valentin Marinov, head of European Group-of-10 currency strategy at Citigroup Inc. in London, wrote in a note to clients. “The rate guidance parameters that the MPC chooses to use as part of its forward guidance may signal more aggressive targets for unemployment and greater tolerance for inflation than currently anticipated.”
The U.K. currency will decline to $1.48 by year-end, according to the median estimate in a Bloomberg News survey of analysts. Sterling will appreciate to 85 pence per euro, a separate survey showed.
The pound has weakened 2 percent in 2013, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro gained 4.9 percent and the dollar climbed 4.6 percent.
The benchmark 10-year (GUKG10) gilt yield was at 2.39 percent after rising to 2.43 percent, the highest level since July 10. The 1.75 percent security due in September 2022 traded at 94.775.
Pimco believes the Bank of England won’t increase interest rates as much as the market is pricing in and recommends investors use short-sterling futures to bet they will stay low, according to fund manager Myles Bradshaw.
“The U.K. economy is facing a lot of structural headwinds,” Bradshaw said on Bloomberg Television’s “The Pulse” in an interview with Francine Lacqua. “It needs to grow faster than trend to eat away at that output gap.”
Short-sterling futures rose, showing investors are cutting bets on higher interest rates. The implied yield on the contract maturing in March 2015 fell five basis points to 0.75 percent. The Official Bank Rate has been at 0.5 percent since March 2009.
Gilts handed investors a loss of 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds fell 1.3 percent and Treasuries fell 2.6 percent.