The pound weakened against the euro and gilts rose as a report showed inflation slowed to the least since November 2009, strengthening the case for the Bank of England to resume asset purchases to revive the economy.
Sterling snapped three days of gains against the yen before the central bank publishes the minutes of its June meeting tomorrow, in which policy makers may indicate their stance on so-called quantitative easing, to lift the U.K. out of recession. Two-year gilts climbed even as stocks advanced and Spanish notes rose after the nation met its maximum target at a bills auction.
“There has been a fairly consistent tendency for sterling to outperform on positive inflation surprises and underperform on negative surprises, and that’s again what we are seeing today,” said Adam Cole, global head of foreign-exchange at RBC Capital Markets in London. “We may see some softness as the markets builds in more expectation of QE.”
The pound fell 0.3 percent to 80.51 pence per euro at 1:40 p.m. London time, declining for the first time in three days. It dropped 0.2 percent to 123.66 yen and was little changed at $1.5669.
Consumer prices rose 2.8 percent from a year earlier, compared with a 3 percent increase in April, the Office for National Statistics said today in London. That’s the weakest since November 2009. Economists had forecast a gain of 3 percent, the median of 29 estimates in a Bloomberg News survey showed. From April, prices fell 0.1 percent, the first drop in that period since records began in 1996.
Oil, Food Costs
Declines by the pound may be limited amid speculation central banks, including the European Central Bank and the Federal Reserve, will also add to stimulus measures, according to Michael Sneyd, a currency strategist at BNP Paribas in SA in London.
“We are not too concerned about the outlook for QE because we also expect easing from the ECB and the Fed,” said Sneyd, who expects the U.K. currency to trade at $1.75 by year-end. The measures announced last week are “positive for the U.K. economy and for sterling,” he added.
BNP Paribas’ forecasts for the pound are the most bullish among 52 analyst estimates compiled by Bloomberg News. The median forecast is for the currency to end 2012 at $1.56.
G-20 Summit
Sterling has appreciated 1.5 percent this year, the second- best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, after the New Zealand dollar, as investors sought U.K. assets as a haven from Europe’s debt crisis. The euro dropped 2.4 percent.
G-20 leaders began a two-day meeting in Mexico yesterday as Spain’s borrowing costs surged to a euro-era record and elections in Greece failed to damp the threat of debt-crisis contagion.
Two-year note yields slipped two basis points, or 0.02 percentage point, to 0.22 percent after falling to 0.173 percent yesterday, the lowest on record. Ten-year gilt yields were little changed at 1.66 percent.
Gilts have returned 2.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds advanced 3.3 percent and Treasuries gained 2.1 percent.
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Anchalee Worrachate at aworrachate@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
