The pound was little changed versus the dollar after the Bank of England kept its benchmark interest rate at a record low of 0.5 percent and left its bond-buying target at 375 billion pounds ($598 billion).
Sterling touched a five-week low against the euro before the decision. The central bank’s Monetary Policy Committee, led by Governor Mark Carney, said in August it would keep down interest rates until unemployment, currently at 7.7 percent, falls below 7 percent. U.K. government bonds declined as signs U.S. lawmakers will agree on a compromise deal to avoid an unprecedented default sapped demand for safer assets.
“It’s all steady as far as BOE policy goes, the bank has been quite vocal over the past couple of months on the policy,” Jane Foley, a senior currency strategist at Rabobank International in London, said before the decision. “The dollar is going higher because there’s some optimism that there could be a temporary extension to the debt ceiling in Washington. There’s potential for sterling to go back down.”
The pound traded at $1.5949 at 12:03 p.m. London time after falling to $1.5914, the lowest level since Sept. 18. It slid 0.9 percent versus the U.S. currency in the past two days. Sterling was also little changed at 84.84 pence per euro after depreciating to 84.93 pence, the weakest level since Sept. 2.
The BOE’s decisions were predicted in two Bloomberg News surveys of economists. The pound slid 0.2 percent versus the dollar and U.K. government bonds fell after the previous announcement on Sept. 5, when officials also left policy unchanged.
Britain’s currency weakened versus all of its 16 major counterparts yesterday after a report showed U.K. industrial production slumped in August, casting doubt on the strength of the economic recovery.
Citigroup Inc.’s Economic Surprise Index for the U.K. slid to 28.1 yesterday, the lowest since July 16. The gauge, which shows whether data beat or fell short of economists’ forecasts, climbed to a nine-month high of 113.30 on Aug. 19.
Sterling declined 0.5 percent in the past week, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar rose 1 percent, while the euro gained 0.2 percent.
The pound strengthened 5.6 percent in the past six months, making it the best performer in the period, the indexes show.
“The pound has been an out-performer among the G-10, but we believe that it has reached over-extended levels,” Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London, wrote in an Oct. 9 note to clients, referring to the currencies of the Group-of-10 nations. “We expect the pound to come under pressure.”
Britain’s currency will decline to $1.51 in the coming year, Stannard predicted.
Carney said in an interview last month that he doesn’t see an argument for expanding the quantitative-easing program because the recovery has strengthened and minutes of the monetary policy committee’s September meeting showed all nine members agreed that the current policy setting was appropriate. Minutes of today’s meeting are due to be released on Oct. 23.
Gilts fell with German bunds and Treasuries as Congressional aides, who spoke on condition of anonymity, said House Republican and Senate Democratic leaders are open to a short-term increase in the $16.7 trillion U.S. debt limit.
Economists say a failure by the world’s largest borrower to repay its debt would throw economies around the world into recession. The U.S. government is entering its 10th day of a partial shutdown before its borrowing authority lapses Oct. 17.
The 10-year (USGG10YR) gilt yield increased four basis points, or 0.04 percentage point, to 2.72 percent. The 2.25 percent bond due in September 2023 fell 0.32, or 3.20 pounds per 1,000-pound face amount, to 95.93.
Treasury 10-year note yields climbed four basis points to 2.70 percent. The rate on German 10-year bunds rose five basis points to 1.86 percent.
Gilts lost 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.7 percent and U.S. Treasuries declined 2.6 percent.
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