Pound Near 22-Month Low on Growing Case for Interest-Rate Cut

By Andrew MacAskill and Kim-Mai Cutler

Aug. 14 (Bloomberg) -- The U.K. pound traded near its lowest level in 22 months against the dollar after the Bank of England cut its economic-growth forecast yesterday, signaling it may reduce interest rates.

Bank of England Governor Mervyn King said yesterday he saw a ``chill in the economic air'' after unemployment climbed in July by the most in almost 16 years. The pound has lost 5.4 percent against the dollar in the past 10 days, more than any other major currency except the South African rand and Australian dollar.

``The central bank has effectively opened the door for an interest-rate cut, possibly as soon as next month,'' Lee Ferridge, a foreign-exchange strategist in London at State Street Global Markets, a unit of the world's largest money manager for institutions, wrote in an e-mailed note to clients today. ``Sterling has obviously reacted significantly to this.''

The British currency was at $1.8750 by 12:18 p.m. in London, from $1.8704 yesterday. It fell earlier to $1.8619, its lowest level since October 2006. The pound rose to 79.57 pence per euro, from 79.76 pence.

The depreciating currency highlights concern a slumping housing market is pushing Europe's second-biggest economy toward a recession. A drop in house prices in July brought the property market to a ``virtual standstill,'' the Royal Institution of Chartered Surveyors said two days ago. The economy will grow about 0.1 percent on a year-on-year basis in the first quarter of 2009, compared with a previous prediction of 1 percent, according to bank forecasts published yesterday.

More Bearish

The pound is down 5.8 percent versus the dollar this year, after being little changed against the U.S. currency as recently as July 31. It fell 7.8 percent against the euro.

Options traders are the most bearish in seven months on the pound versus the dollar, risk reversal rates showed. The premium traders are paying for six-month pound put options, which provide the right to sell the currency, relative to calls rose to 1.2 percentage points, the highest since January, according to data compiled by Bloomberg. Calls grant the right to buy a currency.

Technical indicators suggested the pound is due for a recovery. The 14-day relative strength index was at 20.24 today. A number below 30 signals a change in price direction.

`Extremely Oversold'

``From a technical perspective, cable is extremely oversold,'' wrote Lee Hardman, a currency strategist in London for the Bank of Tokyo-Mitsubishi. ``However, any bounce for the pound is likely to be limited.'' The pound is likely to breach the $1.80 level and 190.00 against the Japanese yen over the next six to 12 months, Hardman forecast.

Government bonds declined, with the yield on the two-year gilt rebounding from the lowest level in three months. The yield climbed 6 basis points to 4.55 percent. The price of the 4.75 percent security due March 2010 fell 0.11, or 1.1 pound per 1,000-pound ($1,872) face amount, to 100.34.

The 10-year yield rose 3 basis points to 4.63 percent. Bond yields move inversely to prices.

``The market is generally consolidating yields near these lower levels,'' said John Wraith, head of U.K. rates-product development at Royal Bank of Canada in London. ``Bonds will be more sensitive to oil and commodity prices as well, as the bank doesn't have control over these external factors.''

Bond Auction

Crude oil rose for a second day, to $117.25 a barrel. Longer-dated U.K. bonds may underperform as inflation erodes returns and the government issues more debt to finance budget deficits during the economic slowdown, driving prices lower, according to Wraith.

The U.K. today sold 925 million pounds of inflation-linked bonds due 2037. The average yield was 0.519 percent and the bid- to-cover ratio, a gauge of demand, was 1.52.

``It's not great, but slightly better than the last two auctions,'' Wraith said. `` This is not a great time of year to be selling debt and there's a fairly nervous market. There is so much more supply coming and investors are spoiled for choice. It's been a struggler to get the paper away.''

Britain's sputtering economy has already pushed the pound below the level at which it's forecast to end 2008. The currency will be worth $1.91 and 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg.

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