BLBG:Pound Holds 2-Day Gain Versus Euro After S&P Cuts Spain’s Rating
The pound held a two-day gain versus the euro after Standard & Poor’s yesterday cut Spain’s sovereign-debt rating, citing mounting economic and political risks as the Spanish government considers a second bailout.
Gilts advanced after New York-based S&P said in a statement it lowered Spain’s credit ranking two levels to BBB- from BBB+, with a negative outlook to the nation’s long-term rating. Bank of England Monetary Policy Committee member Martin Weale said the U.K. could face a triple-dip recession, the Daily Mail reported, citing an interview. The U.K. Debt Management Office sells 1.5 billion pounds ($2.4 billion) of inflation-linked securities due in 2024 later today.
“Even though this was not a major surprise, it adds on to the list of small negatives that have been weighing on the euro of late,” said Audrey Childe-Freeman, head of foreign-exchange strategy at Bank of Montreal (BMO) in London, referring to Spain’s downgrade. “It would appear that all the domestically bearish sterling forces have been sidelined this week and the pound is back up on the safe-haven view.”
The pound was little changed at 80.44 pence per euro as of 10:13 a.m. London time. It gained 0.6 percent in the past two days after reaching 81 pence on Oct. 9, the weakest level since Sept. 17. Sterling gained less than 0.1 percent to $1.6020, after dropping to $1.5977 yesterday, matching the lowest since Sept. 10.
Currency Indexes
The pound has strengthened 0.4 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 2.3 percent and the dollar weakened 0.4 percent.
S&P cited mounting economic and political risks as reasons for its decision.
“The negative outlook on the long-term rating reflects our view of the significant risks to Spain’s economic growth and budgetary performance, and the lack of a clear direction in euro-zone policy,” S&P said in the statement. “The deepening economic recession is limiting the Spanish government’s policy options.”
Signs of recovery in the U.K. remain elusive, Bank of England policy maker Weale said in an interview with the Daily Mail, according to the newspaper. An increase in the central bank’s asset purchase program, a policy known as quantitative easing, could push inflation higher, he said.
Purchase Target
The Bank of England refrained from boosting its asset- purchase target from 375 billion pounds at a policy meeting on Oct. 4. Minutes of the meeting will be released on Oct. 17. The central bank last increased its target in July, adding 50 billion pounds to the program, which is scheduled to end in November.
The 10-year gilt yield less than fell one basis point, or 0.01 percentage point, to 1.75 percent. The 1.75 percent bond due September 2022 traded at 99.86.
The U.K. 10-year breakeven rate, a gauge of market inflation expectations derived from the yield difference between regular and index-linked bonds, was little changed at 2.49 percent. It fell to 2.39 percent on Oct. 3, the lowest level since Aug. 7.
Gilts returned 2.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.1 percent and U.S. Treasuries rose 2.1 percent.
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
