Bank of England Gives Pound Little Respite

  • BOE unlikely to provide any clues on future policy on Dec. 10
  • Sterling weakness to persist irrespective of U.K. data: CIBC

Pound bulls looking for a boost from the Bank of England’s final meeting of 2015 may be disappointed.

After a week where the British currency fell to its lowest versus the dollar in more than seven months, and touched its weakest level against the euro since October, sterling is unlikely to see a significant rebound, according to Lee Hardman, a London-based currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd.

For most of this year, the currency has been caught between monetary policy expectations from the European Central Bank on one side and the Federal Reserve on the other. In addition to that, U.K. economic data in recent weeks have signaled an uneven recovery, further cementing the view that the BOE might refrain from raising interest rates in 2016.

“The pound has been trading on a softer footing in the near term,” Hardman said. Pushed-back expectations of BOE rate increases have “removed one key support factor for the pound in the near term, thus leaving it more vulnerable to the downside for now.”

The BOE is expected to keep rates at a record low of 0.5 percent in December and maintain the status quo on its 375-billion-pound ($566 billion) asset-purchase program on Thursday. The central bank will also release minutes of the meeting when the decision is announced.

“I would suspect it will be a low-key event,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “But markets will be scrutinizing the language within the minutes, whether there is a possible deviation in voting patterns.”

Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a quarter-point rate increase by the BOE until after January 2017, data compiled by Bloomberg show. In August this year, these contracts were signaling a BOE liftoff by mid-2016.

Despite the divergent policy paths of the BOE and its European peer, the pound faltered against the common currency as the ECB’s decision to cut the deposit rate but maintain the pace of its monthly asset purchases on Dec. 3 underwhelmed investors who were positioned for a far more aggressive policy-easing move.

Sterling Declines

Sterling declined 2.2 percent this week to 72.07 pence per euro as of 5:28 p.m. London time on Friday. It reached 72.51 pence on Dec. 3, its weakest since Oct. 22. Sterling gained 0.4 percent to $1.5093, after touching $1.4895 on Dec. 2, the least since April.

Economists surveyed by Bloomberg predict U.K. data released next week will show that manufacturing production dropped in October, while industrial production edged higher. CIBC’s Stretch said that irrespective of data “sterling will probably under-perform the U.S. dollar into the Fed decision” on Dec. 16.

U.K. government bonds fell this week, with the 10-year yield rising 11 basis points, or 0.11 percentage point, to 1.92 percent. The 2 percent gilt due in September 2025 fell 0.945, or 9.45 pounds per 1,000-pound face amount, to 100.695.

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