Pound Declines Against Dollar as U.K. Services Growth Cools

  • Sterling approaches nine-month low versus dollar on Wednesday
  • Index of services falls more than economists forecast

The pound fell to its lowest level in almost nine months versus the dollar, as disappointing economic data added to investors’ doubts whether the Bank of England will lift interests rate this year.

Sterling has dropped every day this week, as its outlook was also clouded by investor concern that Britain’s future in the European Union will be risked in a referendum. U.K. services growth cooled more than economists forecast in December, a report released Wednesday showed. Government bonds in the U.K. advanced as lower oil prices and a slump in global stock markets boosted demand for safer assets.

The U.K. economic situation “isn’t helping the pound’s case,” said Eimear Daly, a currency strategist at Standard Chartered Plc in London. She added that the EU referendum is pushing “expectations for BOE tightening to the sidelines,” and further weighing on sterling.

The pound fell 0.4 percent to $1.4618 as of 5:17 p.m. London time, and it earlier reached $1.4602, the lowest since April 13. Sterling weakened 0.5 percent to 73.59 pence per euro.

The purchasing-managers’ index of services, published by Markit Economics, fell to 55.5 from 55.9 in November. Economists in a Bloomberg survey had forecast a reading of 55.6. The services data closely follow a similar gauge for the manufacturing sector released Monday, which unexpectedly fell to a three-month low last month.

Britain’s planned vote on maintaining European Union membership moved into the spotlight on Wednesday, as Prime Minister David Cameron travels to Bavaria to meet with German Chancellor Angela Merkel and senior members of the Christian Social Union, her political allies, to discuss renegotiating the U.K.’s role in the EU.

Policy Divergence

Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a quarter-point increase to the BOE’s 0.5 percent main rate until after February 2017. In comparison, markets anticipate a more-than-50 percent chance of another increase by the Federal Reserve in April after it lifted rates from a record low last year.

“The policy divergence story between the Fed and the BOE has widened in recent months and that’s one reason why cable has dropped quite sharply,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, referring to sterling against the dollar.

He added that moderate growth in Britain means “the market is more comfortable with the view that the BOE can wait longer throughout this year before raising rates.”

ING Bank NV said on Wednesday it now expects BOE policy makers to refrain from increasing their key interest rate until the end of the year. ING previously predicted a move in the second quarter.

Yields on benchmark 10-year gilts fell eight basis points, or 0.08 percentage points, to 1.79 percent. The 2 percent security due September 2025 rose 0.72, or 7.20 pounds per 1,000-pound face amount, to 101.83.

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