Pound Drops as Market Awaits BOE's Assessment of U.K. Economy

  • A dovish 9-0 vote on Super Thursday can't be ruled out: Mizuho
  • Currency pares decline as EU publishes draft agreement

The pound fell from a three-week high versus the dollar before the Bank of England releases its latest policy decision and economic outlook on Thursday.

Sterling pared its slide after the European Union published a draft agreement aimed at keeping the U.K. in the 28-nation bloc. The document is a template for a settlement to be thrashed out by leaders at a summit in Brussels later this month. With some progress having been made toward avoiding ‘Brexit,’ investors are now turning their attention to how the BOE will respond to the turmoil afflicting global markets.

“Super Thursday is upon us and the market can’t rule out a shift further down the path of doves,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “As for the EU progress, a lot can happen between now and the summit. It’s not clear if a deal will be enough to shift opinion. This is not going to be good for the pound.”

The U.K. currency dropped 0.3 percent to $1.4395 at 5:05 p.m. London time, having tumbled as much as 0.7 percent before the EU announcement. Sterling rose 1.3 percent on Monday, its biggest advance this year, as an expansion in manufacturing made investors more optimistic about the BOE’s quarterly forecasts later this week.

‘Important Compromise’

The pound slipped 0.5 percent to 75.80 pence per euro, after depreciating as much as 1 percent earlier.

The EU draft agreement “is an important compromise and therefore is sterling-positive,” said Valentin Marinov, the London-based head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment bank. “It will increase the chances of a deal ahead of the summit. That said, we suspect the pound could consolidate before the BOE meeting.”

With all 41 economists in a Bloomberg survey predicting the BOE will hold its key rate at a record-low 0.5 percent on Thursday, the economic projections in the central bank’s Inflation Report will be of more interest to investors.

Sustained Drop

Sterling has fallen more than 2 percent against the dollar this year, extending its 5.4 percent drop in 2015, and weakened almost 3 percent versus the euro. Speculation the BOE will refrain from raising rates and concern the U.K. will leave the EU have weighed on the currency.

Officials including Governor Mark Carney and Kristin Forbes have said they’re waiting for wages to increase before raising borrowing costs. Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a quarter-point increase to the official bank rate until after March 2017.

The ructions in global markets, driven by a slowdown in Chinese growth, are spurring demand for haven assets such as gilts.

U.K. government bonds advanced on Tuesday, pushing 10-year yields down by eight basis points, or 0.08 percentage point, to 1.54 percent. The 2 percent gilt due in September 2025 rose 0.715, or 7.15 pounds per 1,000-pound face amount, to 104.065.

Gilts returned 3.2 percent this year through Monday, according to Bloomberg World Bond Indexes, beating all developed-market sovereign bonds.

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