Pound Has Steepest Week Drop in Four Months as Rally Seen EndingEshe Nelson
The pound had the steepest weekly decline in four months as even data showing annual growth rising to pre-financial crisis levels couldn’t shift investor perceptions that the currency’s rally has peaked.
A stagnation in London’s property market added to sterling’s woes versus the dollar today after Bank of England governor Mark Carney said this week interest-rate increases will be more restrained than in the past. The Office for National Statistics said gross domestic product increased 3.1 percent in the year through June. U.K. government bonds rose with Treasuries as a durable-goods orders report for June sparked concern that business investment in the U.S. would weaken.
There’s a sense of “relief as GDP is not weak, but the fact that the pound is back lower suggests to me we may have seen the peak for a while in pound strength, particularly versus the dollar,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Copenhagen. “If pound-dollar hits $1.6750 or so, it is game over for the rally for a long time. Still, the pound might be resilient elsewhere and versus the euro.”
The pound was little changed at $1.6970 as of 5:05 p.m. London time, having declined 0.7 percent this week, the biggest drop since the period ended March 21. It reached $1.7192 on July 15, the highest since October 2008. Sterling was also little changed, at 79.11 pence per euro.
GDP expanded 0.8 percent in the three months to June, matching growth in the first quarter, the ONS said. That was in line with economist estimates in a Bloomberg survey. Annualized growth was the fastest since the final three months of 2007.
A survey of real-estate agents showed home prices in the capital were unchanged in July after increasing 0.5 percent in June, according to Hometrack Ltd. Across England and Wales, prices rose 0.1 percent this month, the report said.
The U.K. currency has weakened against most of its 16 major counterparts since July 18 as comments from the Bank of England damped bets officials would hasten an increase in interest rates, speculation that has made the pound the best-performing major currency in the past year.
Minutes from the BOE’s July policy meeting showed officials had debated whether to increase the emphasis on wage growth as an indicator of future inflation. While consumer prices accelerated to a five-month high in June, separate data last week indicated pay excluding bonuses rose in the three months through May at the slowest pace since records began in 2001.
Wages suggest labor supply is greater than the BOE initially expected, while spare capacity is also being used up faster than the central bank first thought, Carney said on July 23. The same day, minutes showed the nine-member Monetary Policy Committee voted unanimously to keep interest rates at a record-low 0.5 percent.
The pound has gained 11 percent in the past year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro rose 0.8 percent, while the dollar lost 0.4 percent.
U.K. retail sales including auto fuel increased 0.1 percent last month, the statistics office said yesterday. The median forecast of economists was for an rise of 0.3 percent.
“Recent U.K. data has been disappointing and the Bank of England has been more dovish than expected,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “I sense the recent macro data, for example, retail sales and comments from Carney have caused investors to pull the trigger and take profit on pound longs, forcing the pound lower.”
A long position is a bet that a currency will appreciate in value.
The 10-year gilt yield fell four basis points, or 0.04 percentage point, to 2.57 percent. The 2.25 percent bond maturing in September 2023 rose 0.29, or 2.90 pounds per 1,000-pound face amount, to 97.415.
Benchmark Treasury 10-year yields dropped two basis points to 2.48 percent.
While demand for all durable goods rose 0.7 percent, non-defense capital goods shipments excluding aircraft fell 1 percent and a gain posted the prior month was revised to a drop.
Gilts returned 4.5 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a gain of 5.3 percent for German securities and 3.3 percent for Treasuries.