Pound Falls Most in Two Weeks Versus Euro as BOE Rate Cut Looms

  • Swaps indicate 100% chance of rate cut by BOE on Aug. 4
  • U.K. 10-year gilt yield declines to lowest on record

The pound dropped the most in two weeks against the euro as traders anticipated that the Bank of England will lower interest rates for the first time in more than seven years when it announces its latest policy decision on Aug. 4.

Sterling fell versus all of its 16 major peers as swaps indicated a 100 percent chance that the BOE will cut its key rate from a record-low 0.5 percent, where it’s been since March 2009. That compares with odds of about 15 percent on June 23, the day of Britain’s referendum on its European Union membership.

Swaps pricing showed a 96 percent probability that the BOE will cut the rate by 25 basis points to 0.25 percent next week. U.K government bonds rose, pushing the 10-year gilt yield to a record low.

“The fundamentals are still very negative for the pound,” said Lee Hardman, a foreign-exchange strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd. “It will obviously remain under downward pressure ahead of the Bank of England meeting next week. Expectations are building of a more aggressive easing response given the weakness that we have seen in the latest surveys.”

The pound weakened 1 percent to 84.47 pence per euro as of 4:11 p.m. London time, its biggest decline since July 13. Sterling fell 0.7 percent to $1.3127.

Pound Outlook

Hardman forecasts the U.K. currency will weaken toward 87 pence per euro by year-end, a level not seen since August 2013. 

The pound reached a 31-year low against the dollar on July 6 in the aftermath of the Brexit vote, but has since recovered almost 3 percent as the political situation in the U.K. stabilized and after the BOE refrained from policy action in its July meeting. That rebound was curbed after Markit Economics said on July 22 its Purchasing Managers Index surveys showed business activity was at the weakest since the last recession seven years ago.

The PMI data prompted BOE Monetary Policy Committee member Martin Weale, who is known as a hawk, to shift his stance earlier this week and support immediate stimulus.

Surveys “have signaled an increased risk of recession and the Bank of England does place quite a high weight on the PMI surveys in particular, as we heard from MPC member Weale,” Bank of Tokyo-Mitsubishi’s Hardman said. Stability in the pound isn’t a “sustainable development, the risks are very much skewed to the downside,” he said.

The benchmark 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 0.71 percent, having earlier touched a record-low 0.696 percent. The 2 percent bond due in September 2025 rose 0.24, or 2.40 pounds per 1,000-pound face amount, to 111.34.

Gilts returned 2.1 percent in the past month, compared with a 0.1 percent gain in German sovereign securities and a 0.1 percent loss from Treasuries, according to Bloomberg World Bond Indexes.

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