Weak pound to keep BOE from tightening

The pound fell to the weakest level in a month versus the euro as a report showed the U.K. inflation rate stayed near a five-year low, adding to speculation the Bank of England will delay increasing interest rates.

Sterling fell against most of its 16 major counterparts before the central bank publishes minutes of its November policy meeting tomorrow. Consumer prices rose 1.3% in October from a year ago, compared with 1.2% in the previous month, the Office for National Statistics said today. The pound (CME:B6Z14) extended a decline against the common European currency after data showed German investor confidence rose for the first time in 11 months.

“Inflation may have picked up but it is still low and there are plenty of things that could push it lower,” said Kathleen Brooks, European research director at Forex.com in London. “We are bearish on the pound. The BOE is likely to delay raising rates until late 2015. We expect dovish minutes tomorrow.”

Sterling depreciated 0.4% to 79.94 pence per euro at 2:16 p.m. London time after reaching 80.10 pence, the weakest level since Oct. 16. The pound rose 0.2% to $1.5676, ending a four-day decline. It reached $1.5593 on Nov. 14, the lowest since Sept. 6, 2013.

The U.K. currency dropped 2% in the past week, the worst performer among 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Indexes, as investors scaled back expectations for higher interest rates.

Hedge Funds

Hedge funds and other large speculators turned bearish on the pound versus the dollar in September, and held a net 12,891 contracts betting on a decline in the week ending Nov. 11, the most since September 2013, according to the latest Commodity Futures Trading Commission data.

That’s down from 56,412 in favor of a rally in July, the biggest net-long position of any major currency against the dollar. The switch is the fastest since investors went from net longs of 37,321 in December 2012 to a bearish position of 77,738 the following June.

The pound fell for the fourth time in five days against the euro after the ZEW Center for European Economic Research in Mannheim, said today its index of investor and analyst expectations, which aims to predict economic developments six months in advance, increased to 11.5 in November from minus 3.6 in October.

BOE Minutes

The Bank of England left its main interest rate at a record-low 0.5% this month. Two of its nine members, Martin Weale and Ian McCafferty, have pushed for a quarter-point rate increase in recent months to guard against inflation pressures.

The BOE, citing “moribund” global growth and a sluggish euro region, cut its growth forecasts last week to 2.9% in 2015 and 2.6% in 2016, from estimates in August of 3.1% and 2.8%.

U.K. government bonds were little changed, with the 10-year gilt yielding 2.12% after falling to 2.08% yesterday, the lowest since Oct. 16. The price of the 2.75% bond due in September 2024 was at 105.54% of face value.

Gilts earned 10% this year through yesterday, according to Bloomberg World Bond Indexes. German securities returned 8.3% and U.S. Treasuries 5%.

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