Pound Shrugs Off Carney Signal in Longest Losing Run in a Year

Updated on
  • Sterling falls for eighth day against dollar as services slow
  • Selloff reflects doubts on timing of BOE rate increase
Chris Ratcliffe/Bloomberg

It’s less than a week after Mark Carney said early 2016 remains a possibility for raising interest rates, and yet the pound is suffering its longest slump in a year.

Traders are paying little heed to the Bank of England governor’s suggestion that Britain can shrug off the effects of China’s stock-market meltdown and are focusing on signs the domestic economy is losing enough momentum for a rate increase to be delayed.

The latest evidence came Thursday. A report showed U.K. services growth unexpectedly slowed in August, helping push down the pound for an eighth day to a three-month low versus the dollar. Britain’s currency climbed against the euro after European Central Bank President Mario Draghi tweaked his quantitative-easing program to allow it to buy more debt.

“The market is really closely analyzing the macro-economic data as a gauge to decipher when, if any” BOE rate increases will come, said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London.

Britain’s economic slowdown “could delay it,” he said. “That’s already something on peoples’ minds because of global developments, so the pound is being sold off.”

The pound fell 0.4 percent to $1.5232 as of 4:33 p.m. London time in its longest run of declines since October, and dropped to as low as $1.5219, the weakest since June 5. Sterling jumped 0.7 percent to 72.90 pence per euro.

PMI Survey

Markit Economics said its Purchasing Managers Index of services fell to 55.6 last month, from 57.4 in July and short of the 57.7 figure forecast by economists in a Bloomberg survey. A reading above 50 signals expansion.

The slowdown in a sector that accounts for about three quarters of Britain’s economy comes as BOE officials prepare to decide on interest rates on Sept. 10. Data earlier this week showed U.K. construction and manufacturing also trailed economists’ forecasts, which may reduce the chance of a boost to official borrowing costs.

Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase to the BOE’s 0.5 percent main rate won’t come until at least October 2016.

With the turmoil in China and lower commodity prices also clouding the rate outlook, sterling has tumbled against each of its Group-of-10 peers in the past month except the Australian and New Zealand dollars. Speaking in Jackson Hole, Wyoming, Carney said last week that the BOE can ignore the deflationary impact of lower oil prices and the slowdown in China.

Draghi’s Warning

In the euro zone, the tweaking of the ECB’s asset-purchase program acknowledged a “somewhat weaker economic recovery,” Draghi told reporters in Frankfurt after leaving interest rates on hold. The 19-nation monetary bloc is the U.K.’s biggest trading partner, meaning a slowdown there may infect Britain.

U.K. government bonds climbed, with the benchmark 10-year gilt yield falling two basis points, or 0.02 percentage point, to 1.91 percent. The 2 percent bond due in September 2025 rose 0.14, or 1.40 pound per 1,000-pound face amount, to 100.82.