Pound Extends Losing Run as Brexit Seen Sparking More BOE Action

Updated on
  • U.K. currency weakens for fourth straight month versus dollar
  • Sterling is being driven by policy divergence bets with U.S.

The pound fell for a fourth month against the dollar amid speculation the Bank of England will try to soften the economic blow of Brexit with further easing of its monetary policy.

Sterling has dropped versus every major peer since the June 23 referendum on European Union membership, while speculators have boosted bearish bets for the past eight weeks and are now the most pessimistic ever on the U.K. currency.

Even so, the pound’s losses have been tempered as some data covering the summer months beat economists’ forecasts. GfK SE’s household confidence index, published today, rose in August, making up some of the ground lost in the aftermath of the EU vote. That helped sterling rally for the first time in five days.

The respite may not last, with Lloyds Banking Group Plc’s business barometer falling this month and firms the most somber about trading possibilities since 2011. The BOE has already moved to counter the fallout of Brexit by cutting its key interest rate to a record and restarting government-bond purchases -- just as investors anticipate a boost to U.S. interest rates.

Yield Grab

“Monetary policy expectations and yield differentials” are driving the pound, said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, adding that he “wouldn’t be surprised” if it fell to about $1.20 by year-end.

“We’re in this world where we’re forced to go seeking for yield,” he said. “When you start talking about sterling, you have to start looking at it through that prism.”

The pound rose 0.3 percent to $1.3115 as of 4:24 p.m. London time, leaving it down 0.8 percent this month and 12 percent weaker since the U.K.’s referendum. It reached a three-decade low of $1.2798 on July 6. Sterling gained 0.2 percent to 84.99 pence per euro, still set for a third monthly slide.

Economists in a Bloomberg survey this month predicted the BOE would cut rates again in November, even as they saw inflation breaking through the central bank’s 2 percent target just months later, helped by the weaker pound.

Brexit and the central bank easing have been a boon for holders of U.K. government bonds, with the yield on the benchmark 10-year gilt yield dropping for a fourth month and reaching a record-low 0.501 percent on Aug. 15. It was little changed at 0.64 percent Wednesday.

The BOE said it bought 1.17 billion pounds of bonds due in seven to 15 years on Wednesday, as scheduled. Investors offered to sell 3.73 billion pounds of the securities, producing a cover ratio of 3.19.