BS: Pound Declines for Fifth Day Against Dollar as Inflation Slows
The pound fell for a fifth day against the dollar after a government report showed U.K. consumer-price inflation unexpectedly slowed in November to the lowest level in four years.
Sterling dropped to the weakest in a month versus the euro before Bank of England Governor Mark Carney addresses lawmakers in the House of Lords Economic Affairs Committee today for the first time. U.K. government bonds were little changed before the Federal Reserve starts a two-day policy meeting to decide whether to reduce debt purchases that has put downward pressure on borrowing costs around the world.
“Slightly softer-than-expected CPI inflation plays negative for sterling,” said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London. “This gives the Bank of England more room to keep rates low. The fall in inflation seems more about the timing of known utility price hikes and once the market trawls through the data they’ll realize that it’s only likely to be a temporary undershoot.”
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The pound declined 0.2 percent to $1.6265 at 1:22 p.m. London time after falling 0.9 percent in the previous four days. The U.K. currency dropped 0.1 percent to 84.55 pence per euro after depreciating to 84.60 pence, the weakest since Nov. 13.
Carney said in a speech in New York last week the U.K. recovery will need to be sustained for a while before it is strong enough to withstand higher interest rates. He has pledged to keep borrowing costs low until unemployment falls to at least 7 percent, subject to caveats on financial stability and the central bank’s inflation target of 2 percent.
Inflation Slows
Annual consumer-price inflation slowed to 2.1 percent from 2.2 percent in October, the Office for National Statistics said in London. The median forecast of economists surveyed by Bloomberg News was for it to stay at 2.2 percent.
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“The pound weakened a little after inflation came in weaker than expected,” said Peter Kinsella, a currency strategist at Commerzbank AG in London. Before the Fed’s decision on asset purchases tomorrow “you’re seeing mini risk aversion within the currency markets.”
Investors should bet the pound will extend declines against the euro through year-end, exiting the trade at about 85.20 pence, he said.
The pound has strengthened 5 percent in the past six months, the third best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.3 percent and the dollar rose 1.1 percent.
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Gilt Yields
The 10-year gilt yield was at 2.88 percent after rising to 2.98 percent on Dec. 6, the highest level since Sept. 18. The price of the 2.25 percent bond due September 2023 was 94.695.
The 10-year break-even rate, a measure of inflation expectations derived from the yield difference between conventional gilts and index-linked securities, was little changed at 3.06 percent after dropping to 3.05 percent, the lowest level since Dec. 2.
Fed policy makers will reduce bond purchases from $85 billion a month this week, according to 34 percent of economists contacted by Bloomberg on Dec. 6. The proportion was 17 percent in a Nov. 8 survey. The U.S. central bank buys Treasuries and mortgage-backed debt to cap borrowing costs and boost the economy, a policy known as quantitative easing.
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U.K. government bonds handed investors a loss of 3.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities fell 1.7 percent and U.S. Treasuries declined 2.8 percent.
To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
