Pound Falls From Two-Year High as Weale Says Inflation Cooling

The pound fell from a two-year high against the dollar as Bank of England policy maker Martin Weale said there has been a “sharp and unexpected” decline in inflation since the summer.

Sterling depreciated to the lowest in four weeks versus the euro as Weale told the National Institute of Economic and Social Research in London that cooling inflation means it’s less likely that the central bank’s forward guidance policy will be voided. U.K. government bonds were little changed before the Debt Management Office sells 4.5 billion pounds ($7.36 billion) of 2019 gilts tomorrow.

“We’ve had a stellar run with sterling for quite some time now,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. “It’s been on an uptrend against the dollar since mid-November. That alone provides every reason to expect some sort of curtailment in the trend.”

The pound declined 0.5 percent to $1.6361 at 4:19 p.m. London time after rising to $1.6466 yesterday, the highest since August 2011. Sterling fell 0.8 percent to 84.31 pence per euro after depreciating to 84.32 pence, the weakest since Nov. 13. The pound has risen against 13 of its 16 major counterparts in the past three months.

Output Increase

U.K. construction output climbed 1.6 percent in October after falling 0.9 percent the previous month, according to the median forecast of analysts in a Bloomberg News survey before the data on Friday.

Industrial production increased 0.4 percent in October, matching economist estimates, the Office for National Statistics said yesterday. Separate data showed the trade deficit narrowed to 9.73 billion pounds from an upwardly revised 10.1 billion pounds in September.

“The U.K. industrial production data delivered the expected robust reading yesterday,” Morgan Stanley currency strategists led by Hans Redeker in London wrote in an investor note. “But the trade balance highlighted a potential longer-term risk for sterling in the form of a continued wide deficit”

The Bank of England has pledged to keep the benchmark rate at 0.5 percent until unemployment falls to 7 percent subject to caveats on inflation and financial stability. Forward guidance had reduced uncertainty, which “is likely to have provided some stimulus to the economy, but given that only near-term uncertainty has been affected, it is difficult to believe the effect is large,” Weale said.

The benchmark 10-year gilt yield was at 2.87 percent after reaching 2.98 percent on Dec. 6, the highest since Sept. 18. The price of the 2.25 percent bond maturing in September 2023 was 94.765.

The U.K. last sold securities due in 2019 on Nov. 21 at an average yield of 1.905 percent. Investors and market makers both called for two further auctions of the security in the first quarter of next year, according to minutes released yesterday of the Debt Management Office’s Dec. 9 consultation meeting.

Gilts handed investors a loss of 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds fell 1.7 percent and U.S. Treasuries declined 2.5 percent.

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