Pound Declines for Second Week Amid Slowing Economic Momentum

The pound fell for a second week versus the dollar, dropping for a fourth month, as traders pushed back expectations for when the Bank of England will raise interest rates amid signs of a slowing economic recovery.

The four-month decline is the longest losing streak since March 2010. Data this week showed U.K. mortgage approvals fell for a third month in September and as house-price growth slowed last month. Demand for the dollar was boosted as the Federal Reserve ended its bond-purchase program, citing an improving U.S. labor market. BOE Deputy Governor Jon Cunliffe said the central bank will keep supporting Britain’s recovery as long as it can while keeping inflation in check.

“If you look at most recent U.K. data it’s starting to tend to disappoint, mortgage applications would be one case in point,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “The positive momentum that we saw earlier in the year has certainly dissipated to a large extent and that’s definitely weighing on sterling. Adding to that, the Fed was certainly more hawkish than money-market participants had expected. The rationale behind the dollar rally is pretty strong.”

The pound fell 0.6 percent this week to $1.5994 as of 5 p.m. London time yesterday. It dropped 1.4 percent versus the dollar in October. Sterling strengthened for a second week versus the euro, gaining 0.5 percent to 78.36 pence. That pared its decline versus the 18-nation common currency since Sept. 30 to 0.6 percent.

Sterling could decline to $1.56 by year-end, Commerzbank’s Kinsella said.

Rate Forecasts

The pound was little changed in the past month, while the dollar gained 1.4 percent, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. Forward contracts based on the sterling overnight interbank average, or Sonia, show investors have pushed back bets on a 25 basis-point increase in U.K. borrowing costs to beyond September. As recently as August, the market was pricing a move by the central bank in February.

“The Bank of England wants to continue to support the recovery as long as it can, consistent with our job of keeping a lid on inflation,” Cunliffe said in a BBC Radio Wiltshire interview on Oct. 30. The U.K. economy is “growing strongly” though pay hasn’t picked up, he said.

U.K. government bonds were little changed, with 10-year yields at 2.25 percent from 2.23 percent on Oct. 24. The rate fell 18 basis points in October. The price of the 2.75 percent gilt due in September 2024 was 104.415 percent of face value.

The BOE’s Monetary Policy Committee meets next week to decide on interest rates. Data released on Nov. 6 will show industrial and manufacturing production fell in September from a year earlier, according to the median estimates of economists in Bloomberg News surveys.

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