BLBG:Pound Weakens Versus Euro As U.K. Inflation Unexpectedly Slows
The pound fell for the first time in three days against the euro after a report showed an unexpected drop in U.K. inflation, stoking speculation that the Bank of England may take further steps to stimulate the economy.
Sterling slid versus 12 of 16 major peers as consumer prices rose 2.4 percent from a year earlier, down from a 2.8 percent gain in May, the Office for National Statistics said today in London. No change in the rate was forecast, according to a Bloomberg News survey. Ten-year gilts erased their declines following the data, then resumed their drop. A gauge of investor inflation expectations slid to the lowest since 2009.
The inflation data shows “there is scope for the Bank of England to maintain its dovishness,” said Ian Stannard, the head of European currency strategist at Morgan Stanley in London. This will probably “keep sterling under pressure, particularly in an environment where the global growth picture is starting to deteriorate once again,” he said.
The pound fell 0.1 percent to 78.55 pence per euro at 12:25 p.m. London time, and was little changed at $1.5638.
The Bank of England added 50 billion pounds to its asset- purchase program this month as slowing inflation gave policy makers scope to spur an economy struggling to emerge from its first double dip recession since 1975.
The International Monetary Fund lowered its growth forecast for the U.K. economy yesterday. Britain’s gross domestic product will expand 0.2 percent this year and 1.4 percent in 2013, the Washington-based IMF said. That compares with forecasts of 0.8 percent and 2 percent published in April.
‘Sterling Vulnerable’
The “IMF’s economic forecast, with the U.K. seeing one of the biggest downward adjustments, will likely see sterling quite vulnerable,” Stannard said.
Even with the economic contraction, exports to Europe falling and the Bank of England adding to the supply of sterling, the pound has strengthened this year as investors seek refuge from the euro-area turmoil, frustrating Prime Minister David Cameron’s plan to turn the economy around.
The pound appreciated 2.1 percent since December, vying with the Canadian dollar as the third-best performer among 10 developed-market currencies, according to Bloomberg Correlation- Weighted Indexes. The euro dropped 4.5 percent, while the dollar gained 1.4 percent, the indexes show
Sterling may fall to $1.5269 from June 1, the lowest level since January, should it fail to break above so-called resistance at $1.5647, the 50-day moving average, according to data compiled by Bloomberg.
Breakeven Rates
The yield on the 10-year gilt rose two basis points to 1.52 percent, after falling to 1.47 percent yesterday, the lowest level since June 1. The 4 percent security due in March 2022 dropped 0.22, or 2.2 pounds per 1,000-pound face amount, to 122.175. The five-year note yielded 0.57 percent after declining yesterday to a record low 0.531 percent.
Ten-year breakeven rates, a gauge of market inflation expectations derived from the yield difference between regular and index-linked bonds, fell as much as five basis points to 2.32 percentage points, the lowest since September 2009.
Gilts have returned 4.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 4.2 percent, and U.S. Treasuries rose 2.8 percent, the indexes show.
To contact the reporters on this story: Roxana Zega in London at rzega@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
