Pound Falls on Report of BOE Purchases, Waning Earnings Outlook

July 6 The pound tumbled and 10-year gilt yields fell the most in more than two weeks on speculation the Bank of England plans further action to boost the economy and as forecasts for weakening company earnings hurt stocks.
The British currency extended its first weekly drop against the dollar in a month after the Sunday Times said the central bank may increase its program of asset purchases by 25 billion pounds ($40 billion) amid signs that the economic recovery is petering out. Government bonds rose as the FTSE 100 Index slid to the lowest level in more than two months, boosting demand for the safety of fixed-income assets.
“We’re going to see this sterling move coming further as the market gets increasingly nervous about this recovery,” said Ian Stannard, a currency strategist at BNP Paribas SA in London. “Green shoots might be premature and sterling is going to be vulnerable given its cyclical characteristics.”
The pound dropped 1.5 percent to $1.6096, the lowest level since June 9, before trading at $1.6225 as of 5:12 p.m. in London. It fell 1.7 percent to 154.23 yen and lost 0.3 percent to 85.86 pence per euro.
The U.K. currency gained 11 percent against the dollar and the euro this year. In the past two weeks, it dropped more than any of the 16 major currencies as the prospects of an early revival in Europe’s second-largest economy diminish. Gross domestic product will shrink 4.3 percent this year, the Organization for Economic Cooperation and Development said June 24.
Expanded Plan
The Shadow Monetary Policy Committee, a group of economists organized by the London-based Institute of Economic Affairs, called for the government to raise the 150-billion-pound limit on the Bank of England’s asset-purchase plan, the Sunday Times reported yesterday. The newspaper didn’t say where it got the information on the Bank of England’s plans.
“Sterling is coming under increasing pressure as the market focuses on this week’s MPC announcement and the potential expansion of the quantitative-easing program,” Paul Day, chief market analyst at MIG Investments SA in Neuchatel, Switzerland, wrote in an e-mail today. “I continue to favor sterling to underperform after its recent good run.”
Gilts extended gains after the Bank of England paid above- market prices when buying 3.5 billion pounds of gilts maturing between 2020 and 2032 as part of its asset-purchase plan. The bank said it paid an average of 109.52 for 1.1 billion pounds of the 4.75 percent security due March 2020, compared with a market price of 109.21 before the results were announced, according to my blog calulation.
Quantitative Easing
The central bank will buy a further 3 billion pounds of gilts maturing between 2015 and 2019 on July 8, the day before its next interest-rate decision. The Bank of England pledged to spend 125 billion pounds buying bonds in its so-called quantitative-easing program.
Stocks fell around the world and government bonds advanced amid growing concern earnings at the biggest companies will keep falling in the coming three months. The FTSE fell as much as 1.5 percent to 4172.33, its lowest level since April 30.
The year-over-year decline in profit for Standard & Poor’s 500 Index members may narrow to 21 percent from July through September, after declines of an estimated 34 percent in the second quarter and about 60 percent in the year’s first three months, according to data compiled by S&P and Bloomberg.
The yield on the 10-year gilt declined six basis points to 3.67 percent after falling as low as 3.64 percent. The 4.5 percent security due March 2019 rose 0.51, or 5.1 pounds per 1,000-pound face amount, to 106.74. The yield on the two-year note fell six basis points to 1.18 percent.
U.K. government bonds lost investors 0.3 percent this month, compared with a gain of 0.3 percent for U.S. debt and 0.4 percent for German securities, according to Merrill Lynch & Co.’s U.K. Gilts, U.S. Treasury Master and German Federal Governments indexes.