Pound Weakens for Fifth Day Against Dollar After Inflation SlowsEshe Nelson
The pound fell for a fifth day against the dollar after a government report showed U.K. consumer-price inflation unexpectedly slowed in November to the lowest level in four years.
Sterling dropped to a six-week low versus the euro as Bank of England Governor Mark Carney said inflation was approaching the central bank’s target and there was no need yet for an interest-rate increase. The five-day losing streak against the dollar is the longest since August. U.K. government bonds were little changed before the Federal Reserve announces tomorrow whether it will scale back debt purchases that have put downward pressure on borrowing costs around the world.
“Slightly softer-than-expected CPI inflation plays negative for sterling,” said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London. “This gives the Bank of England more room to keep rates low. The fall in inflation seems more about the timing of known utility price hikes and once the market trawls through the data they’ll realize that it’s only likely to be a temporary undershoot.”
The pound fell 0.4 percent to $1.6235 at 4:11 p.m. London time, extending its decline during the past five days to 1.3 percent. The U.K. currency dropped 0.2 percent to 84.58 pence per euro after depreciating to 84.67 pence, the weakest level since Nov. 4.
Carney, testifying before lawmakers in London, said inflation pressures were well contained and the central bank’s policy of interest-rate guidance was working well.
“Inflation has fallen back to within a hair’s breadth of the 2 percent target and the recovery has finally taken hold,” he told the House of Lords Economic Affairs Committee.
The Bank of England has pledged to keep borrowing costs low until unemployment falls to at least 7 percent, subject to caveats on financial stability and the central bank’s inflation target of 2 percent.
Annual consumer-price inflation slowed to 2.1 percent from 2.2 percent in October, the Office for National Statistics said in London. The median forecast of economists surveyed by Bloomberg News was for it to stay at 2.2 percent.
“The pound weakened a little after inflation came in weaker than expected,” said Peter Kinsella, a currency strategist at Commerzbank AG in London. Before the Fed’s decision on asset purchases tomorrow, “you’re seeing mini risk aversion within the currency markets.”
Investors should bet the pound will extend recent declines against the euro through year-end with a target of about 85.20 pence, he said.
The pound has strengthened 4.9 percent in the past six months, the best performer after the Swiss franc among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.3 percent and the dollar rose 1.2 percent.
The benchmark 10-year gilt yield was at 2.88 percent after rising to 2.98 percent on Dec. 6, the highest level since Sept. 18. The price of the 2.25 percent bond maturing in September 2023 was 94.695.
The 10-year break-even rate, a measure of inflation expectations derived from the yield difference between conventional gilts and index-linked securities, was little changed at 3.06 percent after dropping to 3.05 percent, the lowest level since Dec. 2.
The Fed will reduce bond purchases from $85 billion a month at the end of its two-day meeting tomorrow, according to 34 percent of economists contacted by Bloomberg on Dec. 6. The proportion was 17 percent in a Nov. 8 survey. The U.S. central bank buys Treasuries and mortgage-backed debt to cap borrowing costs, a policy known as quantitative easing.
U.K. government bonds handed investors a loss of 3.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities fell 1.7 percent and U.S. Treasuries declined 2.8 percent.