British Pound Snaps Eight-Day Losing Streak Versus U.S. Dollar

By Kim-Mai Cutler and Andrew MacAskill

Aug. 13 (Bloomberg) -- The pound snapped its longest losing streak against the dollar in more than a year on speculation the Bank of England's quarterly inflation report will indicate policymakers won't reduce borrowing costs until next year.

The pound rebounded from its lowest level in almost 21 months against the U.S. currency and advanced against the euro. U.K. inflation accelerated to more than double the central bank's 2 percent target in July, a report showed yesterday. Traders increased bets that the central bank will hold off from cutting interest rates, interest-rate futures showed.

``The consumer-price index suggests that the Bank of England rate cut will come in the spring, not this year,'' said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest bank. ``Sterling may not be able to benefit on the backdrop of a slowing economy and rising inflationary risks but it could stabilize a bit.''

The British currency traded at $1.8987 by 9:04 a.m. London time, from $1.8968 yesterday. The pound fell to $1.8922 earlier, its lowest level since November 2006. It rose to 78.64 pence per euro, from 78.69 pence. The pound will end the year at $1.93, according to Praefcke.

The currency's eight-day losing streak through yesterday was its biggest such decline in more than three years, underlining concern that a slumping housing market is pushing Europe's second-biggest economy toward a recession. The pound was as high as $2.0157 three weeks ago.

Gilts Decline

Government bonds fell today, with the yield on the 10-year gilt rising 2 basis points to 4.65 percent. The price of the 5 percent security due March 2018 dropped 0.14, or 1.4 pounds per 1,000-pound ($1,899) face amount, to 102.70. The yield on the two-year gilt rose 2 basis points to 4.66 percent. Bond yields move inversely to prices.

The Bank of England will release its inflation report today. Consumer prices rose 4.4 percent in July from a year earlier, the fastest pace since comparable records began in 1997, the Office for National Statistics said yesterday.

Traders pared bets the bank will cut interest rates this year, with the implied yield on the December sterling interest- rate futures contract rising 3 basis points to 5.77 percent. The Bank of England's benchmark interest rate is 5 percent.

Britain's slowing economy will leave the pound at $1.91 and 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. The yield on the 10-year note will end the year at 4.87 percent, according to a separate survey.

The pound fell 6.6 percent against the euro this year. It's down 4.2 percent versus the dollar, after being little changed against the U.S. currency as recently as July 31.

``Overall the market will be looking through this peak of inflation and at the deteriorating growth prospects,'' said Ian Stannard, a London-based currency strategist for BNP Paribas SA. ``That is going to be enough to put sterling under pressure.''

The pound may fall to $1.85 by year-end, Stannard said.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net