Pound’s Rally Becoming Burden, Goldman Sachs Says

Having the past year’s best-performing major currency may become a burden for the U.K. economy, according to Goldman Sachs Group Inc.

After reaching the highest level since 2008 on July 7, a trade-weighted index of the pound fell for a third day today as a report showed shop prices tumbled by the most since at least 2006 in June. A gauge of inflation expectations dropped to a three-month low, adding to signs the strength of the currency may be impair future growth.

“The currency is up on a trade-weighted basis almost 10 percent in the last year,” Kevin Daly, an economist at Goldman Sachs in London, said in an interview on Bloomberg Television’s “On The Move” with Manus Cranny. “That leads us to expect that while growth will remain strong, it will moderate to some extent as the year goes through.”

The pound declined 0.1 percent to 79.57 pence per euro at 4:20 p.m. London time. It touched 79.15 pence on July 7, the strongest level since September 2012. The U.K. currency was little changed at $1.7136. A trade-weighted index compiled by Deutsche Bank AG fell 0.1 percent to 84.33, after touching 84.71 two days ago.

The pound has climbed against all of its 16 major peers in the past year as investors bet the Bank of England will be the first major central bank to end extraordinary stimulus measures. While economists surveyed by Bloomberg predict the BOE will leave its benchmark rate at a record-low 0.5 percent tomorrow, derivatives markets show investors are betting on a 0.25 percentage-point increase by February.

BOE Testimony

Nemat Shafik, who’s set to join the Bank of England’s three main policy committees as head of banking and markets, told lawmakers in London today that the recent pace of the U.K. recovery is “striking.”

“Recent output growth and employment have been surprisingly strong,” Shafik said in written testimony. She will take part in her first Monetary Policy Committee meeting next month.

U.K. shop prices declined 1.8 percent in June from a year earlier, the British Retail Consortium said today. A report yesterday showed manufacturing unexpectedly slumped 1.3 percent in May from April, the biggest plunge in 16 months.

Pound long positions are “vulnerable to unwind” and the currency may struggle to extend its advance against the dollar, strategists at BNP Paribas SA led by London-based Steven Saywell, wrote in an e-mailed note. A long position is a bet that an asset will increase in value. Against the euro, the analysts forecast sterling will continue to strengthen to 78 pence per euro this year.

The five-year break-even rate, a gauge of market inflation expectations, fell to 2.813 percentage points today, the least since March 25.

Ten-year gilt yields rose two basis points to 2.66 percent. The 2.25 percent bond maturing September 2023 fell 0.13, or 1.30 pounds per 1,000-pound face amount, to 96.66.

Gilts returned 3.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 5 percent and Treasuries gained 3.1 percent.