The pound fell for a fourth day, on course for its longest losing streak since theBrexit vote, as markets braced for the start of the Bank of England’s expanded monetary easing programme.
UK government bonds rose, pushing five-year yields to a record low, as markets digested the central bank’s plan to reinvigorate the economy in the wake of the June 23rd vote to leave the European Union.
Gilt-purchase programme
As well as cutting interest rates for the first time since 2009, the Bank of England exceeded economists’ expectations with its August 4th policy announcement by increasing its gilt-purchase programme to £435 billion (€512 billion), starting on Monday. Stimulus tends to undermine a currency by boosting the money supply.
“This is a continued feed-through into sterling weakness from the Bank of England,” said Sam Lynton-Brown, a foreign-exchange strategist at BNP Paribas SA in London.The pound has fallen against all 16 of its major peers this year and its outlook for the rest of 2016 looks bleak, with analysts surveyed by Bloomberg forecasting a drop to €1.14 ($1.26) .
Federal Reserve rate increase
Friday’s stronger-than-predicted US payrolls report will continue to hurt sterling versus the dollar because it raises the prospect of a Federal Reserve rate increase by September, Mr Lynton-Brown said, adding that it may be a “key driver” of the exchange rate dropping below $1.30.
Sterling fell 0.2 per cent to $1.3050 as of 11am in London,set for the longest run of declines since May 9th. It sank to a 31-year low of $1.2798 about two weeks after the UK referendum.
The pound dropped 0.2 per cent to 84.98 pence per euro, touching the weakest level since July 12th.
“We’re already pricing a lot for the Bank of England, whereas for the Fed very little is priced,” Mr Lynton-Brown said. – (Bloomberg)
