Pound Is Little Changed Versus Dollar, Euro Before Fed Decision

The pound was little changed against the dollar and euro as investors waited for a Federal Reserve statement that may announce a third series of bond purchases to stimulate growth in the world’s largest economy.
Sterling was within 0.3 percent of a four-month high versus the U.S. currency. Almost two-thirds of economists in a Bloomberg survey predicted the Fed will implement more asset purchases, or quantitative easing. U.K. 10-year bonds rose after the Bank of England said market contacts are skeptical that improvements in sentiment following measures to tackle the euro- area turmoil will be sustained. The nation sold 3.5 billion pounds ($5.64 billion) of gilts maturing in September 2022.

Fed Action Seen to Push Euro as High as $1.35

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Sept. 13 (Bloomberg) -- Steven Barrow, head of Group-of-10 research at Standard Bank Plc, discusses the possible impact of a third round of Federal Reserve bond purchases on the euro and pound. Barrow talks with Guy Johnson on Bloomberg Television's "The Pulse." (Source: Bloomberg)

“The dollar is under pressure going into the Fed decision and the pound could gain further if there is more QE in the U.S.,” said Melinda Burgess, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in London, referring to quantitative easing. If the Fed fails to announce more QE, “a broad risk-off move would support the dollar and bring the pound lower.”
The pound was little changed at $1.6090 at 2:45 p.m. London time after climbing to $1.6131 yesterday, the highest level since May 11. Sterling traded at 80.11 pence per euro. It touched 80.28 pence yesterday, the weakest since July 5.
The U.K. currency has gained 0.5 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 2.3 percent and the euro rose 2.6 percent.

Fiscal Squeeze

RBS has a year-end target of $1.54 based on “low growth” in the U.K. economy and expectations for further quantitative easing from the Bank of England, Burgess said.
Gross domestic product has contracted in the last three quarters, choked by the euro-area sovereign-debt crisis and an austerity program implemented by Chancellor of the Exchequer George Osborne.
The U.K. economy shrank 0.5 percent in the second quarter, the Office for National Statistics said on Aug. 24. The Bank of England downgraded its growth forecasts last month and said the outlook is “unusually uncertain.”
Bank of England policy maker Ian McCafferty said Sept. 11 Osborne “needs to maintain the austerity program” as any easing could push up gilt yields and hurt the central bank’s efforts to boost economic growth.

‘Negative Signals’

“Upside potential for pound-dollar is nearing its limitations, and we expect the pound to come back under pressure in the coming months,” Ian Stannard, head of European foreign- exchange strategy at Morgan Stanley in London wrote in a note today. “Many of our market-based leading indicators for pound- dollar are already giving renewed negative signals, and the domestic U.K. fundamentals remain far from inspiring.”
The median of 44 bank estimates in a Bloomberg survey is for the pound to end the year at $1.55.
The benchmark 10-year gilt yield fell three basis points, or 0.03 percentage point, to 1.81 percent. The 1.75 percent bond due September 2022 gained 0.235, or 2.35 pounds per 1,000-pound face amount, to 99.50.
“Market sentiment appeared to improve in the second half of the review period,” the Bank of England said in its Quarterly Bulletin published today in London. “Some contacts cautioned against placing much weight on this, however, given the seasonal lull in some financial markets during July and August, and the fact that many of the fundamental challenges facing the euro area remained.”
Today’s auction saw the securities sold at an average yield of 1.825 percent. The U.K. last sold 10-year gilts on July 12 at an average yield of 1.719 percent, the lowest since Bloomberg began compiling the data in 1998.
Gilts have returned 2.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2.1 percent and U.S. Treasuries rose 1.7 percent.