Growing Forex Diary
British Pound Rises Versus Euro as BOE Lifts Inflation Forecast
Thursday, February 14, 2008 - - 0 Comments
By Kim-Mai Cutler
Feb. 13 (Bloomberg) -- The pound climbed to a two-week high against the euro after the Bank of England raised its inflation forecast, prompting traders to pare bets on interest-rate cuts.
Britain's currency also traded near the highest level in a week versus the dollar after the central bank forecast in its quarterly inflation report today that price growth will overshoot its 2 percent goal in two years even as ``downside'' risks to the economy remain. The pound also gained as a government report showed unemployment fell to a three-decade low in January.
``Sterling rallied because the market is going to focus on slightly higher rate expectations,'' said Adrian Schmidt, a London-based senior foreign-exchange strategist at Royal Bank of Scotland Group Plc, the fourth-largest currency trader. ``But they've also talked about downside risks for growth.''
The pound climbed to 74.15 pence per euro, the strongest since Jan. 30, and was at 74.28 pence by 4:39 p.m. in London, from 74.41 pence yesterday. It rose to $1.9655, the highest level since Feb. 6, before trading little changed at $1.9611.
It's ``odds on'' inflation will exceed 3 percent, Bank of England Governor Mervyn King said at a press conference in London today after publishing the report. Still, he said he expects a ``marked slowing'' in growth.
The central bank based the forecasts on expectations the benchmark interest rate will fall three quarters of a percentage point to 4.5 percent by year-end.
U.K. Inflation
Inflation expectations climbed to a five-month high today. The yield difference, or breakeven rate, between two-year U.K. nominal bonds and inflation-protected notes of the same maturity rose 8 basis points to 3.45 percentage points, the widest spread since September. The difference represents the inflation rate that's expected over the life of the securities.
Inflation accelerated to a seven-month high last month, the Office for National Statistics said yesterday. Still, the rate was lower than economists forecast as discounting by fashion stores blunted the impact of rising gasoline and food costs.
Claims for jobless benefits in Britain dropped 10,800 from December to 794,600, the lowest since June 1975, a government report showed today. The decline was more than double the 5,000 median forecast in a Bloomberg News survey of 28 economists. The jobless rate stayed at 2.5 percent.
Britain's currency pared gains against the dollar, and gilts dropped, after a U.S. government report showed retail sales in the world's largest economy unexpectedly rose in January.
The 0.3 percent increase followed a 0.4 percent decline the month before, the Commerce Department said in Washington. It was a sign consumer buying, which accounts for the biggest part of the economy, is holding up even as a housing slump deepens.
Gilts Decline
Two-year U.K. government note yields rose 2 basis points to 4.27 percent. The price on the 5.75 percent security due December 2009 lost 0.03, or 30 pence per 1,000-pound ($1,962) face amount, to 102.56. Ten-year gilt yields climbed 2 basis points to 4.62 percent. Yields move inversely to bond prices.
Government bonds will advance for the next six months in the world's biggest debt markets, including the U.K., as the U.S. economic slowdown spreads to Europe and Asia, a survey of Bloomberg users showed.
Bonds will rally in the U.S., Germany, U.K., Italy, France, Japan and Hong Kong, according to the monthly Bloomberg Professional Global Confidence Index, which canvassed more than 6,800 users from New York to Paris to Tokyo.
Policy makers lowered the U.K.'s main rate a half-percentage point to 5.25 percent since December and are weighing the need for a third cut to boost Europe's second-biggest economy. The Federal Reserve reduced its benchmark rate by 1.25 percentage points this year, the fastest pace since 1990.
Rate Expectations
Britain's central bank will lower the rate to 4.75 percent by midyear and to 4.5 percent by the first quarter of 2009, according to the weighted average of 20 forecasts in a Bloomberg survey of analysts.
The chances of a 25 basis-point cut at the March 7 policy meeting have halved this week, to 14 percent, according to a Credit Suisse Group index of probability based on overnight indexed swap rates.
The implied yield on the December sterling futures contract has risen 11 basis points this week to 4.65 percent, the highest level for two weeks, as traders reduced wagers on lower U.K. borrowing costs.
Feb. 13 (Bloomberg) -- The pound climbed to a two-week high against the euro after the Bank of England raised its inflation forecast, prompting traders to pare bets on interest-rate cuts.
Britain's currency also traded near the highest level in a week versus the dollar after the central bank forecast in its quarterly inflation report today that price growth will overshoot its 2 percent goal in two years even as ``downside'' risks to the economy remain. The pound also gained as a government report showed unemployment fell to a three-decade low in January.
``Sterling rallied because the market is going to focus on slightly higher rate expectations,'' said Adrian Schmidt, a London-based senior foreign-exchange strategist at Royal Bank of Scotland Group Plc, the fourth-largest currency trader. ``But they've also talked about downside risks for growth.''
The pound climbed to 74.15 pence per euro, the strongest since Jan. 30, and was at 74.28 pence by 4:39 p.m. in London, from 74.41 pence yesterday. It rose to $1.9655, the highest level since Feb. 6, before trading little changed at $1.9611.
It's ``odds on'' inflation will exceed 3 percent, Bank of England Governor Mervyn King said at a press conference in London today after publishing the report. Still, he said he expects a ``marked slowing'' in growth.
The central bank based the forecasts on expectations the benchmark interest rate will fall three quarters of a percentage point to 4.5 percent by year-end.
U.K. Inflation
Inflation expectations climbed to a five-month high today. The yield difference, or breakeven rate, between two-year U.K. nominal bonds and inflation-protected notes of the same maturity rose 8 basis points to 3.45 percentage points, the widest spread since September. The difference represents the inflation rate that's expected over the life of the securities.
Inflation accelerated to a seven-month high last month, the Office for National Statistics said yesterday. Still, the rate was lower than economists forecast as discounting by fashion stores blunted the impact of rising gasoline and food costs.
Claims for jobless benefits in Britain dropped 10,800 from December to 794,600, the lowest since June 1975, a government report showed today. The decline was more than double the 5,000 median forecast in a Bloomberg News survey of 28 economists. The jobless rate stayed at 2.5 percent.
Britain's currency pared gains against the dollar, and gilts dropped, after a U.S. government report showed retail sales in the world's largest economy unexpectedly rose in January.
The 0.3 percent increase followed a 0.4 percent decline the month before, the Commerce Department said in Washington. It was a sign consumer buying, which accounts for the biggest part of the economy, is holding up even as a housing slump deepens.
Gilts Decline
Two-year U.K. government note yields rose 2 basis points to 4.27 percent. The price on the 5.75 percent security due December 2009 lost 0.03, or 30 pence per 1,000-pound ($1,962) face amount, to 102.56. Ten-year gilt yields climbed 2 basis points to 4.62 percent. Yields move inversely to bond prices.
Government bonds will advance for the next six months in the world's biggest debt markets, including the U.K., as the U.S. economic slowdown spreads to Europe and Asia, a survey of Bloomberg users showed.
Bonds will rally in the U.S., Germany, U.K., Italy, France, Japan and Hong Kong, according to the monthly Bloomberg Professional Global Confidence Index, which canvassed more than 6,800 users from New York to Paris to Tokyo.
Policy makers lowered the U.K.'s main rate a half-percentage point to 5.25 percent since December and are weighing the need for a third cut to boost Europe's second-biggest economy. The Federal Reserve reduced its benchmark rate by 1.25 percentage points this year, the fastest pace since 1990.
Rate Expectations
Britain's central bank will lower the rate to 4.75 percent by midyear and to 4.5 percent by the first quarter of 2009, according to the weighted average of 20 forecasts in a Bloomberg survey of analysts.
The chances of a 25 basis-point cut at the March 7 policy meeting have halved this week, to 14 percent, according to a Credit Suisse Group index of probability based on overnight indexed swap rates.
The implied yield on the December sterling futures contract has risen 11 basis points this week to 4.65 percent, the highest level for two weeks, as traders reduced wagers on lower U.K. borrowing costs.
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