Pound falls below $1.60 on expectation BOE may signal further stimulus

January 9, 2013 06:02 AM


The pound dropped below $1.60 for the first time in five weeks on speculation Bank of England officials meeting this week will signal they may introduce additional stimulus as the economy struggles to recover.

The U.K. currency weakened against all except one of its 16 major counterparts after a government report showed the trade deficit narrowed less in November than economists forecast. Policy makers, who started a two-day meeting today, will announce their decision on interest rates and so-called quantitative easing tomorrow, while minutes of the gathering will be released Jan. 23. Gilts were little changed.

“There’s been some loose talk with some people thinking there might be more QE highlighted tomorrow,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “Subsequently sterling has taken some heat so cable has had a go through that $1.60 threshold. If we close below the $1.5995 level that probably suggests we will see further weakness.”

The pound dropped 0.3% to $1.6012 at 4:38 p.m. after declining to $1.5993, the lowest level since Nov. 30. Sterling was little changed at 81.52 pence per euro, after depreciating to 81.62 pence yesterday, the weakest since Dec. 31. Cable refers to the pound-dollar exchange rate.

Bank of England policy makers will keep the benchmark interest rate at a record-low 0.5% and the asset-purchase target at 375 billion pounds tomorrow, separate Bloomberg surveys show.

Risks Persist

Policy makers voted 8-1 to leave their bond-purchase program on hold in December as immediate dangers from the euro- area crisis receded and near-term inflation risks persisted, according to minutes of that meeting released Dec. 19.

Most members of the Monetary Policy Committee “agreed that developments on the month had done little to alter the balance of arguments between maintaining and increasing” stimulus, according to the minutes. The current level of quantitative easing “seemed appropriate for the present,” it said.

The trade deficit was at 9.16 billion pounds compared with 9.49 billion pounds in October, the Office for National Statistics said in London. The median forecast in a Bloomberg News survey of 20 economists was 9 billion pounds.

The pound has fallen 0.9% in the past week, the worst performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.7% and the euro weakened 0.4%.

U.K. Gilts

The 10-year gilt yield was at 2.03% after falling as much as two basis points. The price of the 1.75% bond due in September 2022 was 97.595.

“Investors are unwilling to take major positions ahead of tomorrow’s BOE meeting,” said Nick Stamenkovic, a strategist at RIA Capital Markets Ltd. in Edinburgh. “We remain bearish about the medium-term outlook, targeting 2.60% for 10-year yields by year-end.”

The 10-year break-even rate, the difference in yield between gilts and index-linked securities, narrowed for a third day amid speculation officials will adjust the way the retail- price index is calculated. The rate shrank less than one basis point, or 0.01 percentage point, to 2.66%.

The U.K. will announce the results tomorrow of a consultation into amending its RPI calculation to counter a widening disparity with the consumer-price index, the basis for the Bank of England’s policy target.

“Likely changes to the measurement of U.K. RPI inflation would be significantly negative for holders of gilt linkers,” Alan James, head of inflation-linked bond research at Barclays Plc in London, wrote today in a note to clients. “This may limit international demand for nominal gilts.”

Gilts lost 1.3% this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.1% and Treasuries fell 0.5%.

Bloomberg News

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