Pound Suffers Record Run of Weekly Losses Against Euro

  • Eight-week slide is the longest since euro's 1999 debut
  • Inflation seen lagging with break-even rate at 6 1/2-year low

Could the British Pound Be Heading to 1985 Levels?

The pound posted an eighth week of declines versus the euro, its longest losing streak since the shared European currency’s 1999 debut.

Sterling is being weighed down by a range of factors, both domestic and global. The market turmoil sparked by China’s devaluation and sliding oil prices are deflating the economic outlook at home and prompting traders to push the anticipated timing of a Bank of England interest-rate increase further into 2017.

“If concerns about China and oil continue then there is more upside for the euro against the pound in the short term,” said Marcus Hettinger, a strategist at Credit Suisse Group AG in Zurich. Risk aversion and “weak economic data in the U.K.” are dragging the pound lower, he said.

Britain’s currency touched its weakest level in a year against the euro on Friday after depreciating almost 4 percent since the start of 2016. It’s also suffering versus the dollar, falling for a third week and touching the lowest level since May 2010. Strategists are tearing up their pound-dollar forecasts, with some anticipating the weakest exchange rate since the 1980s.

Benchmark 10-year government bonds advanced with their European peers, pushing yields to the lowest in nine months, as deteriorating sentiment in global markets boosted demand for the relative safety of fixed-income assets.

The pound dropped 1.6 percent to 76.57 pence per euro as of 4:35 p.m. London time, after touching 76.73 pence, the weakest level since Jan. 22, 2015. It’s down 1.7 percent since last Friday, adding to the previous week’s 2 percent slide, and has fallen 1.5 percent against the dollar in the past five days to $1.4299.

Inflation Bets

Yields on 10-year gilts fell seven basis points on Friday, or 0.07 percentage point, to 1.67 percent, after reaching 1.63 percent, the lowest since April 22. The 2 percent security due in September 2025 rose 0.59, or 5.90 pounds per 1,000-pound face amount, to 102.965.

The 10-year break-even rate, a gauge of the bond market’s outlook for U.K. inflation, dropped to 2.25 percent, a level last seen in 2009. Higher borrowing costs would further damp the consumer-price outlook, so the decline may delay a rate increase.

Forward contracts based on the sterling overnight index average, or Sonia, aren’t pricing in a quarter-point increase to BOE rates until after February 2017, data compiled by Bloomberg show.

Bonds tend to be favored by investors in a time of slow inflation because of the fixed payments they provide.

“We’ve seen weakness in equities markets and a risk-off move,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “Within that backdrop, safe-haven government bonds have been well bid.”

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