The UK pound gained amid speculation and its drop to the lowest in almost two months doesn’t reflect the outlook for an interest rate increase by the Bank of England.
The pound had its biggest back-to-back drop in the last two weeks versus the euro since June 2005 after a report showed inflation unexpectedly slowed. Futures trading indicates investors maintained bets the BOE will lift rates again by end- March, making the pound attractive for the so-called carry trade whereby investors borrow cheaply in a low interest-rate currency such as the yen to invest in higher-yielding currencies.
“We look for sterling to rebound,” said Tania Kotsos, a currency strategist at RBC Capital Markets Ltd. in London. “The carry trade is still pretty much there and interest rates in the UK are still attractive.”
Against the euro, the pound rose to 67.33 pence at 1:36 p.m. in London from 67.42 pence yesterday. The UK currency also advanced to $1.9532 from $1.9514. The pound may trade at $1.97 by the end of next month, Kotsos said.The pound was steady after data showed January growth in M4, the broadest gauge of UK money supply, quickened for the first time in four months, adding to signs of inflation pressures.
A separate report by the British Bankers’ Association showed U.K. mortgage lending and consumer credit weakened in January, a sign higher rates are starting to work to fend off inflation.M4, measuring cash in circulation and bank deposits, rose 13 % in the year after a 12.8 % gain in December, the central bank said. The BOE cited “rapid” growth in money supply and credit as a risk to inflation when it lifted the benchmark cost of borrowing three times since August.
Britain’s interest rate at 5.25 % matches that of the Federal Reserve. The European Central Bank’s key rate is at 3.5%.The premium investors demand for holding 10-year government bonds over similar maturity US debt widened from 4 basis points at the start of the year to 20 basis points on expectations the UK may raise rates while the Fed leaves them unchanged.
The yield on the benchmark 10-year government bond climbed 3 basis points to 4.92 %, climbing for a third trading day. The price of the 4 percent note due September 2016 fell 0.17, or 1.7 pounds per 1,000 pound ($1,953) face amount, to 93.09. Bond yields move inversely to prices.The implied yield on the June interest-rate futures contract rose 1 basis point to 5.74 %, suggesting policy makers will lift borrowing costs once more this year.
The contracts settle to the three-month London inter-bank offered rate for the pound, which averaged about 15 basis points more than the BOE’s benchmark for the past decade.