Pound Drops Most in Five Weeks as U.K. Inflation Misses Forecast

  • Consumer prices rise 0.6% annually in August, below forecast
  • BOE forecast to leave monetary policy unchanged on Thursday

Markets Have Overpriced Brexit Consequences: Rosenstreich

The pound fell the most in five weeks after a report showed U.K. inflation undershot analyst forecasts, bringing into focus the uncertain economic outlook after the nation voted to leave the European Union more than two months ago.

Sterling dropped versus most of its 16 major peers after consumer-price growth matched that of previous month, which still was the highest since late 2014. The Bank of England, which cut its key interest rate and expanded a bond-buying program last month, will leave its stimulus measures unchanged on Sept. 15, analysts forecast. Analysts said investors and traders also sold sterling after its recent rally ahead of policy meetings by the Federal Reserve and the Bank of Japan next week.

Long-dated U.K. government bonds pared gains to stand little changed after the BOE bought 1.17 billion pounds ($1.54 billion) of gilts with maturities longer than 15 years as planned, with offers outstripping bids by 3.21 times.

“We are mostly looking for two-way risks,” said Ned Rumpeltin, the European head of currency strategy at Toronto Dominion Bank in London. “Sterling still has a substantial base of short positions against it. A decent proportion of that will stick to their guns as the medium-term fundamentals for the pound remain very bearish. We remain committed to a sell-on-rallies posture.”

The pound fell 1.2 percent to $1.3175 as of 4:16 p.m. in London. It weakened 1.3 percent to 85.30 pence per euro. Sterling touched a 31-year low of $1.2798 on July 6 and is still down about 11 percent versus the dollar since the Brexit vote.

Consumer prices grew 0.6 percent, the Office for National Statistics said in London, less than the 0.7 percent forecast by economists in a Bloomberg survey.

Retail Sales

Traders also will focus on retail sales data later this week, which a separate Bloomberg survey predicts will show a slowdown.

Data since the June 23 referendum have been mixed. Sterling, still the worst performer among major currencies since the Brexit vote, has outperformed all of its 16 major counterparts in the past month as reports from services to construction showed the U.K. economy was holding up better than some economists predicted.

Fed, BOJ

The Fed and the BOJ will announce their monetary policy decisions on Sept. 21. The dollar strengthened even after Fed Governor Lael Brainard’s comments on Monday damped speculation on a U.S. interest-rate increase.

“The market is preparing for next week by lightening up on risk,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “The pound is still seen as one of the riskier currencies at present, given that the outlook for the economy could darken from here, and that could encourage the BOE to ease policy further.”

The yield on 10-year gilts was at 0.87 percent, having fallen earlier as much as five basis points, or 0.05 percentage point. The price of 1.50 percent security due in July 2026 was 105.92 percent of face value. The yield on 30-year gilts was little changed at 1.53 percent.

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