Pound Rallies From 5 1/2-Year Low as Markets Shake China Turmoil

  • BOE meeting to be highlight in busy week for U.K. data
  • Forward markets not pricing in increase to bank rate this year

The pound recovered from a 5 1/2-year low against the dollar and its weakest level in 11 months versus the euro as the effects of China’s economic turmoil faded.

A faltering domestic and global economy and concern Britain is headed for the European Union exit door has seen sterling fall against seven of its Group-of-10 counterparts this year. Waning prospects for an interest-rate increase by the Bank of England also weighed on the pound, before the relief rally. Sterling pared its gains later in the afternoon as European stocks erased an advance.

“We’ve had some stabilization early on in the European equity market trading session and that’s helping the pound to rebound,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The pound is one of those currencies within the majors, which is more vulnerable to the deterioration in global investor risk sentiment.” This is “temporary relief,” he said.

The pound rose 0.2 percent to $1.4548 as of 4:45 p.m. London time, after slumping to $1.4494, its lowest level since June 2010. Britain’s currency strengthened 0.5 percent to 74.86 pence per euro, having earlier touched 75.55 pence, the weakest since February.

Mixed Picture

Sterling’s rally comes at the start of a busy week for U.K. data, with industrial figures due Tuesday forecast by economists to show production stalled and a manufacturing report seen showing an improvement in November. The BOE also has its first meeting since the Federal Reserve raised U.S. interest rates.

The U.K. central bank is forecast to leave its main rate unchanged at 0.5 percent in its Thursday decision. Forward contracts based on the sterling overnight index average, or Sonia, aren’t pricing in a quarter-point increase until after February 2017, data compiled by Bloomberg show.

Traders will scour through the minutes of the meeting to see whether more hawkish policy makers have changed their minds on the potential for higher borrowing costs.

“If Ian McCafferty joins the majority of the people and stops voting for the rate hike, that certainly will be a burden for the pound,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt.

Ten-year U.K. government bond yields rose one basis point, or 0.01 percentage point, to 1.78 percent. The price of the 2 percent security due September 2025 fell 0.06, or 60 pence per 1,000-pound face amount, to 101.975.

Britain’s Debt Management Office is scheduled to sell 900 million pounds of inflation-linked bonds maturing in 2046 on Tuesday.

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