Pound Drops to Six-Week Low as Rate-Bet Rally Wanes

The pound fell for a second day against the dollar, reaching the lowest level in six weeks, as investors judged the rally that helped push the U.K. currency to a 4 1/2-year high was overdone.

Sterling slid for a fourth day versus the euro, the longest losing streak since March. U.K. bonds rose, pushing the 10-year yield down the most in two weeks, as government debt securities across Europe advanced. The Debt Management Office sold 1.1 billion pounds ($1.84 billion) of index-linked gilts due in 2052 today. The pound is the best performing major currency in the past year as investors bet the Bank of England will hasten plans to increase interest rates.

“Although sterling has its attractions, you get the sense that enthusiasm has waned,” said Neil Mellor, a London-based currency strategist at Bank of New York Mellon. “Whether there’s enough out there to take on the $1.70 level, I have my doubts at the moment because the question of interest rates is just a little more uncertain than it was. The market’s looking to lock in profit at the moment and it may need another catalyst.”

The pound declined 0.6 percent to $1.6714 at 4:44 p.m. London time after falling to $1.6698, the lowest since April 15. It reached $1.6996 on May 6, the highest since August 2009. Sterling fell 0.3 percent to 81.35 pence per euro after depreciating to 81.43 pence, the weakest level since May 21.

Rates Plans

The pound has risen 9.5 percent in the past year, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as a strengthening U.K. economy boosted speculation BOE Governor Mark Carney will raise rates sooner than policy makers anticipated. The euro gained 3.6 percent, while the dollar weakened 2.7 percent.

The central bank said in its quarterly Inflation Report published on May 14 that while the level of spare capacity in the economy had “narrowed slightly” in the past three months, there “remains scope to make greater inroads into slack before raising” borrowing costs.

Officials are set to next announce BOE policy on June 5. Money-market investors see no rate increase from the current record-low 0.5 percent until after April next year, according to forward rates on the sterling overnight interbank average compiled by Tullett Prebon Plc. That compares with bets for the first increase in March before the inflation report was released.

The U.K. currency fell through its six-month uptrend level of $1.6784, which will “see the market come under downside pressure,” Karen Jones, a technical analyst in London at Commerzbank AG, wrote in e-mailed note today. Sterling may find support at $1.6683, she wrote.

Rate Expectations

The 10-year gilt yield fell nine basis points, or 0.09 percentage point, to 2.55 percent, the steepest drop since May 14. The 2.25 percent security due September 2023 rose 0.725, or 7.25 pounds per 1,000-pound face amount, to 97.52.

“Fixed income is performing relatively well across the board,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “Rate expectations are still quite aggressive. Although there’s relatively supportive factors in play, in the 10-year sector it’s not going to see that much support further in the curve.”

The yield on German 10-year bunds slipped five basis points to 1.34 percent and that on similar-maturity Spanish bonds fell as much nine basis points to a record 2.798 percent.

Gilts returned 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries rose 3.3 percent and German securities gained 4.1 percent.

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