Pound Drops Most in 4 Months as Fed, BOE Rate Expectations Vary

The pound had the biggest weekly drop in four months versus the dollar as the Federal Reserve and Bank of England gave divergent signals on the future path of interest rates, boosting the relative allure of the greenback.

Sterling fell versus all but three of its 16 major peers after Fed Chair Janet Yellen indicated U.S. borrowing costs may rise next year and the minutes from the Bank of England’s March policy meeting showed officials voted unanimously to keep its rate at a record-low 0.5 percent. U.K. government bonds fell with Treasuries as Yellen said the Fed would continue to cut stimulus. The Debt Management Office said gilt sales in the next fiscal year will be the lowest since 2007.

“If sterling is to surge, real news on interest-rate hikes is required,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “The Bank of England minutes seem to have reinforced the notion that rates will remain at record lows into next year.”

The pound weakened 0.9 percent to $1.6491 at 4:58 p.m. London time yesterday, the biggest decline since the period ending Nov. 1. It slid to $1.6476 yesterday, the lowest since Feb. 12. The U.K. currency was little changed at 83.65 pence per euro after depreciating to 84 pence on March 19, the weakest level since Dec. 25.

Economic Data

The jobless rate held at 7.2 percent in the three months through January, jobless claims fell more than analysts forecast and the Office for Budget Responsibility revised up its forecasts for economic growth.

The pound fell 0.7 percent this month, the worst performer after the Canadian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 0.2 percent and the dollar fell 0.3 percent.

Yellen signaled on March 19 U.S. borrowing costs could start rising “around six months” after the central bank stops buying bonds. The Fed reduced the monthly pace of bond purchases to $55 billion and said reductions of its stimulus program, currently at $10 billion a month, would continue “in further measured steps.” The BOE minutes, released the same day, said the growing economy may further strengthen the pound.

Gilt Sales

The Debt Management Office said gilt sales would be 128.4 billion pounds for the new fiscal year, starting next month, down from a revised 153.4 billion pounds in the current year. Primary dealers surveyed by Bloomberg estimated the figure would be 151 billion pounds.

The benchmark 10-year yield climbed eight basis points, or 0.08 percentage point, to 2.75 percent, the biggest increase since the period ending Dec. 27. The 2.25 percent gilt maturing in September 2023 fell 0.66, or 6.60 pounds per 1,000-pound face amount, to 95.89.

U.K. inflation slowed to 1.7 percent in February from a year earlier, the lowest since October 2009, according to the median estimate of economists in a Bloomberg News survey before the statistics office releases the data on March 25.

The nation plans to sell 900 million pounds of inflation-linked bonds maturing in March 2052 on March 27.

Gilts returned 2 percent this year through March 20, according to Bloomberg World Bond Indexes. Treasuries gained 1.4 percent and German securities earned 2 percent.

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