Pound Falls Fourth Day Against Dollar Before Inflation ReportLucy Meakin
The pound weakened for a fourth day against the dollar on speculation investors cut their holdings of the U.K. currency before the Bank of England presents its updated inflation forecasts tomorrow.
Sterling dropped to a two-week low versus the euro even after an industry report showed a gauge of U.K. house prices climbed to the highest level since June 2010. The pound has slumped 2.4 percent against the dollar since strengthening to a three-month high of $1.5606 on May 1. Government bonds fell as the Debt Management Office sold 4.75 billion pounds ($7.25 billion) of five-year gilts.
“Going into the inflation report tomorrow you’ve seen some people taking off some of the long cable positions,” said Peter Kinsella, a currency strategist at Commerzbank AG in London, referring to ending bets the pound will rise against the dollar. “People who are looking at price action would look at the failure to breach $1.56 over the past two weeks as being a sign that upside in cable from here is rather capped.”
The pound dropped 0.3 percent to $1.5246 at 4:53 p.m. London time after declining to $1.5229, the lowest level since April 24. Sterling fell 0.3 percent to 85.05 pence per euro after depreciating to 85.17 pence, the least since April 25.
Mervyn King will hold his last news conference as Bank of England Governor tomorrow after the central bank publishes its quarterly survey in London.
The pound tumbled 0.8 percent against the dollar and euro on Feb. 13 when the BOE published its previous Inflation Report, which said risks to the recovery were weighted to the downside and weak productivity was boosting cost pressures.
The pound is vulnerable to a “dovish inflation report” following recent gains versus the euro driven by reduced expectations of further asset purchases, Credit Suisse Group AG strategists led by Ric Deverell in New York, wrote yesterday in a note to clients.
The pound has strengthened 1.9 percent in the past month, the third-best performer after the Canadian and U.S. dollars among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The greenback rose 2.6 percent and the euro gained 1.4 percent.
The Royal Institution of Chartered Surveyors said its index of U.K. home prices climbed to 1 last month from minus 2 in March. A positive number means more respondents saw values increase than decline. A measure of inquiries from new buyers increased to 25 from 13, the highest since November 2009.
The pound also weakened after Prime Minister David Cameron offered to support a bill authorizing a referendum on the U.K.’s continued membership in the European Union. His Conservative Party will “publish a draft bill to legislate for an in-out referendum by the end of 2017,” according to a party statement released yesterday.
Scotland will hold a referendum on the issue of independence from the United Kingdom in September next year.
“Political risk is undoubtedly rising in the U.K.,” said Steve Barrow, head of Group-of-10 research at Standard Bank Plc in London. “There’s the vote on Scottish independence next year, which will definitely go ahead, and there’s a possible U.K. referendum on EU membership. It could mean a rocky few years but, in our view, neither will significantly undermine the pound.”
The U.K. sold gilts maturing in July 2018 at an average yield of 0.967 percent, compared with 1.041 percent at the previous auction of the securities on March 5 and a record-low 0.787 percent set in November.
The benchmark 10-year gilt yield climbed two basis points, or 0.02 percentage point, to 1.90 percent after rising to 1.91 percent, the highest since March 20. The 1.75 percent bond due in September 2022 fell 0.13, or 1.30 pounds per 1,000-pound face amount, to 98.76.
Gilts handed investors a loss of 1.6 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds fell 0.9 percent and Treasuries dropped 1 percent.