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Pound Drops as Investors Await BOE's Latest Decision, Forecasts

  • Sonia forwards pricing no rate hike until beyond March 2017
  • Officials voted 8-1 to hold rates at record low last month

The pound was little changed against the dollar, holding its biggest jump since October, as investors await Bank of England’s latest interest-rate decision and economic forecasts.

With all 41 analysts in a Bloomberg survey predicting the BOE will hold its official rate at a record-low 0.5 percent, investors’ focus is on the economic projections in the central bank’s quarterly Inflation Report for any hints on the bank’s assessment of the U.K.’s rate path.

After a rout in global equities and commodities in January, 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. At the turn of the year an increase in November 2016 was priced in.

“We don’t think the BOE is going to say anything to suggest they are inclined to be easing, and that the next move is still likely up,” said Richard Kelly, London-based global head of market strategy at Toronto Dominion Bank. “But nor do I expect them to suggest they are rushing to hike any time soon. Some of the extreme pricing in the market is probably going to recede slightly.”

Sterling has dropped about 5 percent since the day before the BOE’s November inflation report, touching the lowest level since 2009 last month. Even so, the U.K. currency has rallied since then and climbed the most in almost four months on Wednesday, as signs of a slowing U.S. economy helped derail bets on diverging policies between global central banks.

The pound was at $1.4595 as of 11:45 a.m. in London, after climbing 1.3 percent on Wednesday. It dropped to $1.4080 on Jan. 21, the lowest since 2009. Sterling weakened 0.6 percent to 76.52 pence per euro.

BOE Minutes

The BOE will release minutes of its meeting alongside the decision, which will show how the nine-member Monetary Policy Committee voted. Last month, there was speculation that Ian McCafferty -- who’s been voting for a 25 basis-point increase since August -- would reverse his call. He stuck to his position and cited a drop in the pound as an upside risk for consumer prices.

U.K. government bonds declined for the first time in three days, pushing 10-year gilt yields up six basis points, or 0.06 percentage point, to 1.59 percent. The 2 percent security due in September 2025 fell 0.505, or 5.05 pounds per 1,000-pound face amount, to 103.65. The yield dropped nine basis points in the previous two days.

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