Pound Falls on BOE Interest Rate Caution

By Dow Jones Business News, 
A A A


By Josie Cox and Katie Martin

The Bank of England knocked some of the froth off the perky pound Wednesday.

Sterling sank sharply against other major currencies, shedding a cent against the dollar to reach its lowest point in two months and suffering a similar dip against the euro, after the central bank hinted in its quarterly Inflation Report that drab wage growth could hold back the timing of its first rise in interest rates, now penciled in for early 2015.

The shift in the central bank's language was mild. But traders and investors have racked up large positive bets on the pound over the past year.

The currency has gained over 13% against the dollar since last July, and made similar climbs against the euro, with some wagering that a rise in interest rates could be coming this year.

Positive bets on sterling, and the currency's value, had started to ebb over the past month, but analysts at BNP Paribas pointed to a "position overhang," with a heavy weight of such bets still outstanding when the report was revealed. The stance from the Bank of England Wednesday proved to be a trigger for more of those positions to fold.

In a note, Citigroup, the world's largest currencies dealer, said its sterling trader in London has shifted into selling the pound. "This no longer looks like a correction, but rather a downtrend. I have cut all of my sterling longs and will look to sell rallies," the trader said. The bank's U.K. economist Michael Saunders said "there is nothing in the inflation report and [Governor Mark] Carney's comments to indicate that the monetary policy committee is close to the first hike at present. By contrast, we had expected that the Inflation Report would signal that a late-2014 rate hike is in play."

Earlier in the day, the wages component in the monthly U.K. employment data fell shy of expectations. Average weekly earnings excluding bonus payments rose at an annual pace of just 0.6% in the three months to June, the slowest pace of growth since comparable records began in 2001, data from the Office for National Statistics showed. The BOE cut its forecasts for wage growth to 1.25% from 2.5%, while Mr. Carney underscored the notion that rate rises, when they do arrive, will be small and gradual.

That tone is a disappointment to some who were still hooked on Mr. Carney's statement in June that U.K. interest rates could rise "sooner than markets expect."

"Markets listened, responded and have now listened some more and taken back their initial position," said Kit Juckes, a macro strategist at Société Générale.

"To me, this Inflation Report clearly puts a nail in the coffin of any ideas about possible outperformance of [ sterling against the dollar]," said Peter Kinsella, a senior currency strategist at Commerzbank AG in London, adding that the best way to trade the currency now is to sell it against the buck.

Underscoring the key role played by stale bets on sterling, U.K. government bonds were relatively steady. The yield on U.K. government bonds maturing in 10 years dipped by 0.03 percentage point to 2.45%, marking a small pickup in price. Stocks barely budged.

"We've been seeing a sea-change in sterling since the middle of July," said Daragh Maher, currency strategist at HSBC, adding that the Inflation Report had enhanced the momentum of the currency's recent stumble, and caught many investors off guard.

Write to Josie Cox at josie.cox@wsj.com and Katie Martin at katie.martin@wsj.com


  (END) Dow Jones Newswires
  08-13-141025ET
  Copyright (c) 2014 Dow Jones & Company, Inc.


This article appears in: US Markets , Forex and Currencies , Economy , International

Referenced Stocks: C

Dow Jones Business News


More from Dow Jones Business News:

Related Videos

Tiny Homes With Big Appeal
Tiny Homes With Big Appeal          

Stocks

Referenced

74%

Most Active by Volume

270,887,127
    $93.89 unch
225,243,115
  • $40.93 ▼ 2.74%
135,900,109
  • $47.52 ▲ 1.80%
89,467,924
  • $5.35 ▼ 1.11%
85,105,358
  • $16.95 ▼ 0.53%
80,748,539
  • $39.80 ▼ 4.21%
68,491,586
  • $3.57 ▼ 1.79%
62,097,356
  • $100.96 ▼ 0.82%
As of 9/19/2014, 04:15 PM