Pound Approaches 8-Week Low Versus Dollar Before BOE Decision

By Alexa Liautaud and David Goodman  

The pound approached its weakest level in eight weeks versus the dollar before Bank of England officials announce their latest policy decisions following a two-day meeting.
U.K. 10-year government bond yields dropped to the lowest in almost a year. The central bank’s Monetary Policy Committee will keep its key interest rate at a record-low 0.5 percent today, according to all 47 analysts surveyed by Bloomberg News. Officials have been united in voting to leave policy unchanged since Governor Mark Carney’s first meeting in July 2013. The BOE will update its economic forecasts next week and minutes of this week’s discussions will be released on Aug. 20.
“The next couple of weeks are going to be key for pound direction in the near term,” Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said by phone yesterday. “Market reaction will all come in the following week when we get the release of the Inflation Report and then the minutes in the week after.”
The pound fell 0.1 percent to $1.6841 at 8:44 a.m. London time after touching $1.6814 on Aug. 4, matching the lowest since June 12. Sterling was at 79.41 pence per euro, from 79.40 pence yesterday.
The pound has weakened 0.1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track
10 developed-nation currencies. In the past year, it was the best performer, gaining 10 percent as investors brought forward bets on the timing of the BOE’s first increase in interest rates since 2007.

Purchase Target

Policy makers will keep their asset-purchase target at 375 billion pounds, according to all 35 economists in a separate Bloomberg survey. The benchmark interest rate has been at 0.5 percent since March 2009.
With economists unanimously predicting no change in rates, “all the attention will be on whether or not there is a split vote” among committee members, Daniel Vernazza, an economist at UniCredit SpA in London, wrote in a note dated Aug. 6. “Our expectation is that one or two members will vote for a hike, with a sizable risk that no one does.”
Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting U.K. borrowing costs will increase by a full 25 basis points by March. Barclays Plc and Deutsche Bank AG are among institutions that forecast the central bank will increase interest rates in the fourth quarter, according to data compiled by Bloomberg.

Data Dependent

“As the economy normalizes, Bank Rate will need to start to rise in order to achieve the inflation target,” Carney said in a speech in Glasgow, Scotland, on July 23. “But the MPC has no pre-set course and the timing of any increases in interest rates will be determined by the data.”
The pound slid and U.K. bonds gained yesterday after reports showing industrial and manufacturing output rose less in June than economists forecast boosted concern the U.K.’s economy is falling short of analysts’ estimates.
The 10-year gilt yield dropped two basis points, or 0.02 percentage point, to 2.50 percent after touching 2.49 percent, the lowest since August 2013. The 2.25 percent bond due in September 2023 climbed 0.145, or 1.45 pounds per 1000-pound face amount, to 98.01.
Gilts returned 5.7 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a gain of 6 percent for German securities and 3.6 percent for Treasuries.