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Sterling Recovery Not Soon

Sterling Recovery Not SoonSterling Recovery Not Soon

British pound bulls hoping for a sustained recovery in the currency may be disappointed as next week brings a combination of domestic data and a European Union summit that may confirm the timing of the UK’s referendum on its membership.

Sterling depreciated against most of its 16 major peers this week as Prime Minister David Cameron stepped up lobbying efforts to reach a deal that may allow him to hold a vote as early as June. A date is only likely to be set, though, following the EU summit in Brussels on Feb. 18-19. Reports next week are forecast to show inflation and wage growth remained little changed, according to economists in Bloomberg surveys.

“Data will be the main driver for the pound,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “I don’t see any significant recovery of the pound at this point because there are so many other risks apart from the fundamental ones, including the upcoming EU summit. We might get clarity on the vote’s timing next week but not on its final outcome,” she said.

The pound slipped 1% this week to 77.66 pence per euro in London on Friday. Sterling fell 0.3% in the week to $1.44.

  Rate Outlook

Forward contracts based on the sterling overnight index average, or Sonia, project the chances of a 25-basis-point cut in the BOE’s official bank rate by the December meeting were about 56%. As recently as the turn of the year, an increase in November was fully priced in.

UK government bonds climbed this week. The benchmark 10-year gilt yield fell 15 basis points, or 0.15 percentage point, to 1.41% after dropping to 1.22% on Thursday, the lowest since Bloomberg began collecting the data in 1989. The 2% security due in September 2025 rose 1.32, or £13.20 per £1,000 face amount, to 105.225.

The UK’s Debt Management Office is scheduled to sell £2.75 billion of gilts due in July 2026 on Feb. 17. It allotted £1.5 billion of gilts due in January 2045 on Feb. 11 to yield 2.2%, a record low for a 30-year auction.

UK government bonds declined, pushing the 10-year gilt yield up from a record low set Thursday, as a rout in global markets showed signs of easing, reducing demand for the relative safety of fixed-income assets.

The benchmark 10-year gilt yield increased 10 basis points, or 0.1 percentage point, to 1.41% in London, after dropping to 1.22% on Thursday, the lowest since Bloomberg began collecting the data in 1989. The 2% security due in September 2025 fell 0.94, or £9.40 per £1,000 ($1,445) face amount, to 105.30.

 

Financialtribune.com