Pound Rises Versus Dollar as Inflation Slows Less Than Forecast

By Matthew Brown

June 16 (Bloomberg) -- The pound rose from a one-week low against the dollar after a report showed U.K. inflation slowed in May less than economists predicted, making it more likely the Bank of England will raise interest rates.

Sterling also advanced versus the Swiss franc after the Office for National Statistics said consumer prices rose an annual 2.2 percent, compared with 2.3 percent in April. The rate was forecast to fall to 2 percent, according to a Bloomberg survey. Policy makers cut the main rate to 0.5 percent in March and began buying bonds to lower borrowing costs.

“The higher-than-expected inflation number is clearly supporting sterling,” said Marcus Hettinger, a foreign-exchange strategist in Zurich at Credit Suisse Group AG, Switzerland’s largest bank by market value. “The market is pricing in higher interest rates.”

The pound advanced for the first time in three days, rising 0.9 percent to $1.6461 at 1:52 p.m. in London. It earlier fell to $1.6215, the lowest level since June 9. Sterling climbed 0.1 percent to 84.45 pence per euro and appreciated 0.3 percent to 1.7864 Swiss francs.

Traders increased bets today on a boost in interest rates, with short sterling futures for March delivery rising to 1.86 percent, from 1.83 percent yesterday.

“The currency is increasingly sensitive to signals on inflation and associated interest-rate decisions, however distant they may be,” said Gregory Claeys, an economist in Paris at Calyon, the investment-banking unit of Credit Agricole SA.

Moving Averages

The pound may extend its advance against the dollar after two technical indicators known as moving averages crossed.

The U.K. currency’s 50-day moving average, currently at $1.5422, passed yesterday through its 200-day moving average of $1.5361. When a shorter-dated moving average rises through a longer-dated one, further gains in a currency are likely. For the pound, the cross was the first in three years. A moving average is a technical indicator that displays the average value of a security over a period of time.

The last time the pound’s 50-day moving average climbed through the 200-day measure was in May 2006, which marked the beginning of a 12 percent rally to $2.1161 in November 2007, the highest level in 26 years.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

‘Not Over’

“Pound strength is not over,” said Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank Ltd. “Overseas investors still find U.K. assets cheap. The risk-aversion bubble from excessive fear in 2009 is bursting. The pound is benefiting as we move away from the fear trade.”

U.K. two-year gilts, which are sensitive to interest-rate expectations, fell, pushing the yield up four basis points to 1.42 percent. The 4.25 percent security due in March 2011 fell 0.08, or 80 pence per 1,000-pound face amount, to 104.81. The 10-year gilt yield rose three basis points, or 0.03 percentage point, to 3.90 percent. Bond yields move inversely to prices.

Britain sold a greater-than-expected 7 billion pounds ($11.5 billion) of 25-year gilts after receiving more than 10 billion pounds in bids, bankers said.

The debt will be priced to yield 11 basis points more than the 4.25 percent gilt maturing in 2032, used as a benchmark for the security, the bankers managing the sale said. The amount exceeded the 3 billion pounds to 5 billion pounds the Debt Management Office estimated yesterday would be raised.

The yield was revised down from the earlier range of 12 basis points to 15 basis points bankers indicated earlier because of the increased demand.

Barclays Plc, Goldman Sachs Group Inc., HSBC Holdings Plc and Royal Bank of Scotland Group Plc arranged the transaction. They will price the bond and allocate it to investors later today, the bankers said.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net