Pound Drops to 4-Month Low Versus Euro Before BOE; Gilts Decline

The pound depreciated to the weakest level since March against the euro as a gauge of U.K. shop prices fell for the third month and before the Bank of England’s latest policy decision.

Sterling slid for a fourth day versus the dollar as investors awaited the central bank announcement tomorrow, the second under new Governor Mark Carney. The Bank of England will release its quarterly Inflation Report next week in which it will include deliberations on adding future guidance on interest rates to policy tools. The pound dropped for a seventh day versus the European common currency, the longest losing streak since January. Gilts fell for the first time in five days.

“Sterling is extremely vulnerable in this environment,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “It has not generated independent support from positive data surprises. There is scope for the Bank of England to flatten rate expectations with guidance and given that sterling is one of the most sensitive currencies to changes in rate expectations we expect it to come under pressure.”

The pound declined 0.5 percent to 87.45 pence per euro at 4:23 p.m. London time after touching 87.61, the weakest since March 12. It posted a 2.3 percent drop this month, the most since January. The U.K. currency slid 0.4 percent to $1.5181. The four-day losing streak is the longest since June 28.

The British Retail Consortium-Nielsen Co. Shop Price Index fell 0.5 percent in July from a 0.2 percent drop the previous month.

Interest Rate

The nine-member Monetary Policy Committee will keep its bond-purchase program at 375 billion pounds, according to all but one of 42 economists in a Bloomberg News survey. Officials will also hold the benchmark interest rate at a record low of 0.5 percent, a separate survey showed.

The European Central Bank and the Federal Reserve will also announce policy decisions this week.

Sterling has weakened 1.6 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro strengthened 0.8 percent and the dollar declined 1.4 percent.

The yield on the 10-year gilt climbed four basis points, or 0.04 percentage point, to 2.36 percent. The price of the 1.75 percent bond due September 2022 fell 0.32, or 3.20 pounds per 1,000-pound face amount, to 95.07.

Carney Reputation

U.K. government bonds have returned 0.8 percent since Carney took over as governor of the central bank at the start of July, outperforming their German and U.S. counterparts. Holders of Britain’s 10-year securities are demanding the lowest yield relative to similar-maturity Treasuries in seven years and the yield spread to bunds narrowed for the first month since April.

“Carney comes with a very strong reputation, much stronger than the ECB’s,” Georgios Tsapouris, a London-based investment strategist at Coutts & Co., which oversees $47 billion, said yesterday in a phone interview. “If Carney says something, it’s a much more credible signal than if the ECB says something, because he’s practiced forward guidance before at the Bank of Canada. We’re more likely to see Carney going into more concrete intermediate targets.”

Returns this month pared gilts’ declines to 2.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds lost 1.3 percent and U.S. Treasuries declined 2.6 percent in 2013.

Before it's here, it's on the Bloomberg Terminal.