Photographer: Chris Ratcliffe/Bloomberg

Pound Falls for Third Month as Traders Anticipate BOE Rate Cut

  • Brexit, recent subpar U.K. data keep sterling under pressure
  • TD Bank forecasts pound dropping to $1.20 by end of year

The pound is heading for its third monthly decline as investors anticipate the Bank of England will cut interest rates and add stimulus to stem a potential fallout from Brexit.

Sterling has weakened versus all of its 16 major peers in the past three months and remains under pressure as economic consequences of Britain’s vote in June to exit the European Union begin to surface. Swaps pricing show a 100 percent chance the BOE will reduce its main interest rate from a record-low 0.5 percent, where it’s been since March 2009.

Brexit has been the main driver for the pound, according to Ned Rumpletin, the London-based European head of currency strategy at Toronto Dominion Bank. He predicts “aggressive action from the BOE” which will “fuel extended declines in the pound.” Rumpletin forecasts sterling depreciating to $1.20 by the end of the year.

The pound climbed 0.8 percent to $1.3270 as of 4:28 p.m. London time. That reduced its loss in July to 0.3 percent, after depreciating almost 9 percent in the previous two months. Sterling was little changed at 84.17 pence per euro, putting it on course for a 0.8 percent decline this month.

Data released Friday showed a drop in mortgage approvals and that a measure of consumer confidence fell this month at its fastest pace in more than a quarter century. Earlier this month, a worse-than-expected purchasing managers index showed a contraction in manufacturing and services sectors, prompting once-hawkish BOE Monetary Policy Committee member Martin Weale to call for more stimulus.

Markets are pricing in a 97 percent probability that the central bank will trim its rate to 0.25 percent when it announces policy on Aug. 4, with 3 percent expecting it to be reduced to zero percent.

Record low

The benchmark 10-year gilt yield fell two basis points, or 0.02 percentage point, to 0.69 percent on Friday and was headed for a decline of 18 basis points in July. The yield earlier touched a record low 0.681 percent. The 2 percent bond due in September 2025 rose 0.22, or 2.20 pounds per 1,000-pound ($1,328) face amount, to 111.555 percent, and headed for a gain of 1.565 in the month.

David Tan, London-based head of rates at JPMorgan Asset Management, said he expects yields to be “sustained at these lower levels for quite some time.”

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