Pound Rises Against Dollar Even as Economy Slows; Bonds Decline

  • Sterling gains 2.5 percent on trade-weighted basis this year
  • Economists forecast BOE's base rate increase in 2Q next year

The pound advanced versus the dollar and euro, even after a report showed growth cooled off in the third quarter, as Britain remains among the world’s best-performing major economies.

Sterling increased against all except two of its 16 major peers as data was published showing the economy expanded 0.4 percent in the quarter, down from a revised growth pace of 0.5 percent in the previous three months. U.K. government bonds declined, as they did across Europe.

“Growth in the U.K. may have cooled, but it is still one of the best performing Group-of-10 economies,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Inflation is subdued and the BOE is in no rush to hike” interest rates, she said before the data report, referring to the Bank of England. The central bank “is still happy to signal that the next policy move will be a tightening. This should keep the pound from falling too far.”

Sterling rose 0.3 percent to $1.4871 as of 4:50 p.m. London time, halting a seven-day decline that was the longest streak since the end of September. It appreciated 1 percent to 73.17 pence per euro. 

The economy’s performance matched the weakest level since 2012 and contrasted with quarterly growth that averaged about 0.7 percent last year. The BOE held its benchmark interest rate at a record-low 0.5 percent this month, and officials have indicated they are in no hurry to follow the Federal Reserve, which raised the key U.S. rate for the first time in almost a decade last week.

Weighted for Trade

Still, the pound has gained 2.5 percent on a trade-weighted basis this year, according to a Deutsche Bank AG measure. The BOE will increase its benchmark rate to 0.75 percent in the second quarter of next year, according to the median forecast of economists compiled by Bloomberg.

The yield on 10-year gilts rose seven basis points, or 0.07 percentage point, to 1.94 percent. The 2 percent security due in September 2025 dropped 0.585, or 5.85 pounds per 1,000-pound face amount, to 100.515.

Gilts returned 1.1 percent this year through Tuesday, outperforming U.S. Treasuries and German government securities, which earned 1 percent and 0.7 percent during the same period, according to Bloomberg World Bond Indexes.

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