Pound Declines Versus Euro Before BOE Report on Forward Guidance

The pound weakened for the first time in four days against the euro before the Bank of England presents a review tomorrow of implementing forward guidance in its quarterly Inflation Report.

Sterling dropped from the strongest in a week versus the single currency even after data showed Britain’s industrial production rose more in June than economists forecast. Central Bank Governor Mark Carney will present the central bank’s assessment of the use of thresholds and interest-rate guidance in the Inflation Report as requested by the government. Five-year gilts dropped for a sixth day as the Debt Management Office sold 4.5 billion pounds ($6.91 billion) of the securities.

“Going into the Inflation Report, we favor being positioned bearish on the pound,” said Michael Sneyd, a currency strategist at BNP Paribas SA in London. “Not only are they likely to implement forward guidance, they are also likely to implement thresholds or give a positive spin on their assessment of thresholds in such a way to suggest that they could be introducing” them in the future, he said.

The U.K. currency weakened 0.3 percent to 86.56 pence per euro at 4:45 p.m. London time after appreciating to 86.19 pence, the strongest level since July 26. The pound was little changed at $1.5373 after rising to $1.5392, the highest since July 29.

There’s a 68 percent probability sterling will weaken to its 2013 low of 88.151 pence per euro by year-end, according to an FX Rate Forecast model based on data compiled by Bloomberg.

‘Not Warranted’

Carney has already taken steps to curb higher borrowing costs, saying at the central bank’s policy meeting last month that the “implied rise in the expected future path of bank rate was not warranted” by economic developments. He introduced forward guidance in April 2009 when he was governor of the Bank of Canada.

He will align Bank of England policy closer to the Federal Reserve’s by linking guidance on interest rates to economic developments, according to a Bloomberg News survey of 43 economists published last month. Twenty-three said the governor will opt to link a pledge on loose policy to economic data, while 18 said he will use a period of time.

“Caution of a surprise by Carney has prevented sterling from benefiting from the improved economic data and the modest backing up of interest rates,” analysts at Brothers Harriman & Co. led by Global Head of Currency Strategy Marc Chandler in New York, wrote in a note to clients. “Barring a significant surprise from Carney, we suspect sterling could trade higher; recover further against the euro, where the ECB is likely to keep rates low for longer.”

Sterling may test its July high near $1.5435, they wrote.

Pound’s Decline

The pound has weakened 1.5 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro rose 5.9 percent and the dollar gained 5 percent.

The five-year gilt yield rose two basis points, or 0.02 percentage point, to 1.40 percent after climbing to 1.43 percent, the highest level since July 8. The 1.25 percent security due in July 2018 fell 0.09, or 90 pence per 1,000-pound face amount, to 99.28.

The 10-year yield was little changed at 2.48 percent.

The Debt Management Office sold additional five-year gilts at an average yield of 1.405 percent, compared with 1.422 percent at the previous auction on June 20 and a record-low 0.787 percent set at a sale in November.

Gilts lost investors 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries dropped 2.8 percent and German bonds declined 1.4 percent.

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