The pound’s best rally in eight months against the dollar may be in danger of unraveling as investors brace for the stewards of both monetary and fiscal policy to give sobering messages on the outlook for Britain’s economy.
Sterling, still the worst-performing Group-of-10 currency of 2016, got a reprieve in the past two weeks. The gains reflected easing investor concern that the nation will vote to leave the European Union. The pound posted its biggest gain in more than a month against the euro on Friday, a day after the European Central Bank cut interest rates in a stimulus package, highlighting the relative appeal of U.K. assets.
The momentum may end should Chancellor of the Exchequer George Osborne follow through on his warning that he may inflict more austerity on an economy already beset by weaker-than-forecast tax revenue and growth. Osborne is set to publish his budget on March 16, while the Bank of England’s Monetary Policy Committee including Governor Mark Carney will release their interest-rates decision the following day.
“We could get a two-pronged attack,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “I don’t necessarily see too much in terms of a real bullish prognosis right now in terms of growth so that’s the thing we are going to have to watch out for from a currency perspective. The MPC next week will likely take the similar tune as other central banks on dovishness.”
The pound appreciated 1.3 percent this week to $1.4417 as of 5:03 p.m. in London, pushing its gain since Feb. 26 to 3.9 percent, the biggest since the two-week period through June 19. Sterling dropped 0.3 percent versus the euro this week to 77.52 pence, even after jumping 1 percent on Friday.
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While the pound’s relative-yield appeal versus the euro was entrenched by the ECB’s decision to push the deposit rate deeper below zero, the outlook is less positive versus the dollar, with the Federal Reserve having already started raising rates in December.
Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a 25-basis-point increase to interest rates until at least after the end of this year. The odds the Fed will follow with another increase in 2016 are about 78 percent, futures prices compiled by Bloomberg indicate.
U.K. government bonds declined for a second week, with the 10-year gilt rising nine basis points, or 0.09 percentage point, to 1.58 percent. The 2 percent security due in September 2025 fell 0.83, or 8.30 pounds per 1,000-pound face amount, to 103.725. The yield reached 1.226 percent on Feb. 11, the lowest since Bloomberg began collecting the data in 1989.
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