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Pound declines as market awaits BoE assessment

Feb 02 2016 12:46
Anchalee Worrachate

London - The pound fell from a three-week high versus the dollar before the Bank of England (BoE) releases its latest policy decision and economic assessments on Thursday.

Sterling weakened for the first time in four days against the euro as the European Union (EU) said it was closer to a compromise with the UK over revised membership terms as Britain edges closer to a make-or-break moment with the 28-nation bloc. BoE policy makers are scheduled to announced their interest-rate decision and economic forecasts on February 4.

“Super Thursday is upon us and the market can’t rule out a shift further down the path of doves,” said Neil Jones, head of hedge-fund sales at Mizuho Bank in London. “While non- inflation data looked solid, consumer-prices data remained weak and it doesn’t help that we have a weak global economic backdrop.”

The pound dropped 0.4% to $1.4375 as of 12:15, having climbed to $1.4445 on Monday, the highest since January 14. The UK currency jumped 1.3% on Monday, its biggest gain since October 14. Sterling weakened 0.6% to 75.91 pence per euro, having strengthened 1.4% over the previous three days.

Construction slows

The UK currency extended its decline as a report showed construction expanded at the slowest pace last month since April. Markit Economics in London said its gauge, based on a survey of purchasing managers, fell to 55 last in January from 57.8 a month earlier. Economists in a Bloomberg survey had forecast a drop to 57.5.

While all 41 economists in a Bloomberg survey predict the BoE will keep its key interest rate at a record low of 0.5%, where it’s been since March 2009, investors will focus on the economic path laid out in the quarterly Inflation Report by the policy makers.

Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a 25-basis-point increase to the BOE’s official bank rate until after March 2017.

UK government bonds advanced, pushing 10-year yields down four basis points to 1.58%. The 2% gilt due in September 2025 rose 0.39, or 3.90 pounds per 1 000-pound face amount, to 103.74.

Gilts returned 3.2% this year through Monday, according to Bloomberg World Bond Indexes, beating all developed-market sovereign bonds as investors pared back expectations for rate increases by the BOE.

‘Brexit’ referendum

A compromise with the EU will pave the way for Cameron to clinch an agreement from his fellow leaders at a summit on February 18 to February 19 and campaign for Britain to stay in the bloc.

As part of what has been agreed, and in response to UK concerns that the EU is not sufficiently accountable to voters, national parliaments would be able to block European legislation if 55% of them join together, officials said. They made no mention of how the agreement seeks to answer Cameron’s demands on welfare payments to non-British EU workers in the UK, which has proved most contentious.

“It seems that investors are awaiting Cameron’s response to the latest EU proposal,” said Valentin Marinov, the London-based head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment bank.

“This is an important compromise and signals that at least two of the more controversial UK demands could be addressed before long. The pound could recover if there are more indications that a compromise between the UK and the EU is drawing near going into the February EU summit.”

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markets  |  currencies  |  pound

 
 
 
 

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