Pound falls as traders look beyond growth data

London - The pound fell as traders looked beyond stronger-than-forecast UK growth data and turned their attention to Wednesday’s Federal Reserve decision and next week’s Bank of England meeting for signs of diverging monetary policies.

Sterling fell versus most of its 16 major peers after the data, which mainly cover the period before Britain voted to leave the European Union.

“The fact that the pound fell tells you that the market is seeing right through this,” said Gavin Friend, a strategist at National Australia Bank Ltd. in London. “It sees it as a historical number with expectations of weakness to come. That’s quite indicative of the way the market is now looking through anything that’s good.”

The pound weakened 0.3% to 83.90 pence per euro as of 14:06. Sterling fell 0.2% to $1.3101.

NAB’s Friend forecasts the pound will slide to $1.25 by year-end.

Gross domestic product grew by 0.6% in the second quarter, compared with 0.4% growth in the three months ended March, the Office for National Statistics said. The median forecast of economists in a Bloomberg survey was for an expansion of 0.5%.

Rate speculation

Purchasing managers’ data released last week offered the first glimpse into the UK economy since the country voted for Brexit. Markit Economics said July 22 its business-activity surveys were at the weakest levels since the last recession seven years ago, showing contraction in both services and manufacturing sectors. The data revived speculation that the BOE will ease monetary policy as soon as next week.

Futures signal an 100% chance that rates will be cut from the record-low 0.5% when the BOE announces its latest decision on August 4. That compares with odds of about 15% on June 23, the day of Britain’s referendum on its EU membership.

While Fed fund futures indicate only an 10% chance of a rate increase at this week’s meeting, there’s about a 49% chance rates will rise by the Fed’s December gathering, according to data compiled by Bloomberg.

“What matters for pound exchange rates, generally, is what the BOE will do at its meeting in August,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. That decision will be “based on how the economy evolved” since Britain’s decision to leave the EU.

UK government bonds climbed, with the benchmark 10-year gilt yield falling four basis points to 0.78%. The 2% bond due in September 2025 rose £3.65 per £1 000-pound face amount, to 110.685. The yield on the nation’s two-year gilt fell two basis points to 0.15%.

Gilts returned 2.7% in the past month, compared with a 0.3% gain from Treasuries, according to Bloomberg World Bond Indices.


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