Pound Traders Expecting Passive BOE Look to China for Impetus

  • Sterling drops to lowest since 2010 versus dollar this week
  • Goldman, ING push back forecasts for BOE rate increase

When Bank of England policy makers meet in London to set monetary policy next week, pound traders may still be taking their cue from events about 5,000 miles away.

The pound fell to a five-year low against the dollar this week after a rout in Chinese equities roiled global markets. The turmoil, and subsequent tumble in commodity prices, is making analysts and traders more pessimistic on the outlook for the BOE’s first rate-increase since 2007. That means next week’s meeting may be overshadowed by the fallout from events in China, according to Viraj Patel, a currency strategist at ING Bank NV in London.

“A fragile risk environment will continue to be the single-biggest driving factor behind the pound movement in the coming week," he said. "The policy rationale of the Bank of England has not changed. It has been dovish and will continue to be dovish.”

ING, Goldman Sachs Group Inc. and Rabobank International this week pushed back forecasts for a BOE rate increase into the fourth quarter of this year. Futures traders are even more pessimistic, with forward contracts based on the sterling overnight index average, or Sonia, not fully pricing in a quarter-point rate increase until after February 2017. The central bank will announce its latest decision on Jan. 14.

The pound fell 1.6 percent in the week to $1.4516 at 5:50 p.m. London time on Friday, after touching $1.4507, the least since June 2010. Sterling weakened 1.7 percent to 75 pence per euro, declining for a seventh week.

The U.K. currency was also hurt this week as manufacturing and services growth fell short of economists’ estimates, and Chancellor of the Exchequer George Osborne warned of a "dangerous cocktail" of global threats facing the U.K. economy. A planned referendum on Britain’s European Union membership is further reducing the currency’s allure.

Data next week is forecast to fail to offer dramatically better news, with reports due Jan. 12 likely to show manufacturing and industrial production were little changed in November, according to economists surveyed by Bloomberg.

U.K. government bonds advanced this week as investors sought the safest assets amid the turmoil in China. The yield on the 10-year security fell 19 basis points, or 0.19 percentage point, to 1.77 percent, the biggest drop since July. The 2 percent gilt due in September 2025 rose 1.685, or 16.85 pounds per 1,000-pound face amount, to 102.035.

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