BLBG:Pound Holds Two-Day Advance Versus Dollar Before Fed Decision
The pound held a two-day advance against the dollar amid speculation the Federal Reserve will announce a third round of bond purchases to stimulate growth in the world’s largest economy.
Sterling approached a four-month high versus the U.S. currency as almost two-thirds of economists in a Bloomberg survey predicted the Fed will announce more asset purchases known as quantitative easing, or QE. U.K. 10-year bonds rose after the Bank of England said market contacts are skeptical that improvements in sentiment following measures to tackle the euro-area turmoil will be sustained. The nation sold 3.5 billion pounds ($5.64 billion) of debt maturing in September 2022.
“The dollar is under pressure going into the Fed decision and the pound could gain further if there is more QE in the U.S.,” said Melinda Burgess, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. If the Fed fails to announce more QE, “a broad risk-off move would support the dollar and bring the pound lower.”
The pound was little changed at $1.6107 at 12:27 p.m. London time after climbing to $1.6131 yesterday, the highest level since May 11. Sterling fluctuated between gains and losses against the euro, trading at 80.15 pence after strengthening to 80.06 pence and depreciating to 80.25. It touched 80.28 pence yesterday, the weakest level since July 5.
The U.K. currency has gained 0.6 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 2.3 percent and the euro rose 2.7 percent.
RBS Target
RBS has a year-end target of $1.54 based on “low growth” in the U.K. economy and expectations for further quantitative easing from the Bank of England, Burgess said, while foreign exchange strategists at Morgan Stanley, including Ian Stannard are also skeptical about the pound’s potential to rally.
“Upside potential for pound-dollar is nearing its limitations, and we expect the pound to come back under pressure in the coming months,” Stannard wrote in a note today. “Many of our market-based leading indicators for pound-dollar are already giving renewed negative signals, and the domestic U.K. fundamentals remain far from inspiring.”
The benchmark 10-year gilt yield fell one basis point, or 0.01 percentage point, to 1.82 percent. The 1.75 percent bond due September 2022 gained 0.09, or 90 pence per 1,000-pound face amount, to 99.355.
Improved Sentiment
“Market sentiment appeared to improve in the second half of the review period,” the Bank of England said in its Quarterly Bulletin published today in London. “Some contacts cautioned against placing much weight on this, however, given the seasonal lull in some financial markets during July and August, and the fact that many of the fundamental challenges facing the euro area remained.”
Today’s auction saw the securities sold at an average yield of 1.825 percent. Investors bid for 1.8 times the amount of bonds on offer. Britain last sold 10-year gilts on July 12 at an average yield of 1.719 percent, the lowest since Bloomberg began compiling the data in 1998.
Gilts have returned 2.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2.1 percent and U.S. Treasuries rose 1.7 percent.
To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
