Pound Analysts Caught Out as Dovish Carney, U.S. Jobs Spark Drop

  • BOE says pound's strength weighing on U.K. inflation
  • Gilts slide as U.S. nonfarms data boost Fed rate speculation

The waning prospect of a Bank of England interest-rate increase next year is confounding strategists’ predictions for the pound and U.K. government bonds.

BNP Paribas SA and Morgan Stanley’s calls for sterling to strengthen versus Norway’s krone were scuppered within hours of publication after the BOE signaled it will maintain Britain’s record-low interest rate for longer and Norway’s central bank refrained from further monetary easing, in decisions made Thursday.

Friday’s better-than-forecast U.S. jobs report compounded a drop in sterling versus the dollar, sending it tumbling to the lowest since April, as the data bolstered the case for the Federal Reserve to raise rates next month. Some of the world’s biggest currency traders cut their sterling forecasts since the BOE’s Thursday gathering, with Deutsche Bank AG saying the pound will drop about 16 percent to $1.27 by the end of next year.

“With a near-term hiking cycle off the table, the rationale for being long-sterling has disappeared,” Oliver Harvey, a London-based strategist at Deutsche Bank, wrote in an e-mailed note Thursday. “We recommend turning short.”

Carney’s Warning

A long position means betting a currency will strengthen, while going short means the opposite. The pound fell 0.9 percent to $1.5071 at 5 p.m. London time, dropping 2.3 percent in the week, its sharpest since March. It strengthened 0.4 percent to 71.29 pence per euro, erasing an earlier decline, and fell in the week against all but three of its 16 major peers.

In a policy statement that surprised strategists with its dovishness, BOE Governor Mark Carney and colleagues also ramped up warnings that the pound’s strength will continue to push down on inflation. Speculation the central bank would be among the first in developed markets to raise rates has underpinned a 5 percent gain in a trade-weighted sterling index this year, on course for the biggest jump since 2009.

Rate Outlook

Rates strategists are also reconsidering their forecasts after the BOE. Standard Chartered Plc said the central bank won’t raise borrowing costs until the third quarter of next year and cut its end-2016 prediction for the 10-year gilt yield to 2.4 percent from 2.6 percent.

Bond market forecasters are being buffeted by the outlook for global policy, though. After sliding on Thursday, 10-year gilt yields rebounded to the highest since July alongside those on Treasuries as the U.S. jobs data bolstered the global rate outlook.

Forward contracts based on the sterling overnight index average, or Sonia, indicated that a full quarter-point boost to the 0.5 percent official bank rate won’t come until November 2016.

The U.K. 10-year bond yield rose seven basis points, or 0.07 percentage point, to 2.03 percent on Friday. The 2 percent bond due in September 2025 fell 0.63, or 6.30 pounds per 1,000-pound face amount, to 99.66.

Before it's here, it's on the Bloomberg Terminal.