Pound Near $1.50 Underlines Speculation Low Rates to Persistby
U.K. currency declines to lowest since April 23 against dollar
Bond spreads signal gains may be limited amid jump versus euro
The pound stayed near the lowest level in seven months, after falling below $1.50, as the newest member of the Bank of England’s Monetary Policy Committee said he’s comfortable with keeping interest rates at a record low.
Even as sterling rallied versus the dollar and climbed for the first time in three days versus the euro, bond markets reflected that outlook for U.K. rates, which may weigh on further gains in the currency. The extra yield, or spread, that investors get for holding two-year Treasury notes instead of U.K. government securities widened to the most since 2006.
“Cable is now converging to the very low pound-dollar rates spread,” said Valentin Marinov, head of Group-of-10 foreign-exchange strategy at Credit Agricole SA’s corporate and investment bank unit in London, referring to the exchange rate between the two currencies. Sterling “could continue to flirt with a sustained break below $1.50 as the week progresses and investors continue to add to long-dollar positions.”
Reports this week will back the low-rate outlook and show slowdowns in British manufacturing and construction, economists surveyed by Bloomberg predict. Economic growth has to “stabilize or even pick up a bit” and wages need to rise more strongly before the BOE should consider its first rate increase since 2007, new policy maker Gertjan Vlieghe said in an interview with the Sunday Times newspaper.
His words reinforced the dovish stance adopted by colleagues including Governor Mark Carney. Investors are betting the Federal Reserve will raise interest rates in December, while forwards based on the sterling overnight index average, or Sonia, aren’t fully pricing in a BOE increase until after January 2017.
The pound was little changed at $1.5043 as of 5 p.m. London time, having slipped to $1.4994, the weakest level since April 23. It posted its biggest monthly drop since March, down 2.5 percent in November.
Sterling advanced 0.4 percent to 70.21 pence per euro. The shared currency was pushed lower against most of its peers Monday on speculation the European Central Bank will unveil additional monetary stimulus measures at its meeting this week.
The yield on two-year U.K. bonds was little changed at 0.61 percent, leaving it 32 basis points, or 0.32 percentage point, lower than that on similar-maturity Treasuries. The price of the 1 percent gilt maturing September 2017 was at 100.70 percent of face value.