January 13, 2020 / 7:48 AM / 11 days ago

Pound slides as slowing economy fuels rate cut expectations

LONDON (Reuters) - Sterling fell sharply on Monday, slipping further below $1.30, after data showed Britain’s economy grew at its weakest annual pace in more than seven years in November and raised the chances of a cut to interest rates.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration

Britain’s economy grew only 0.6% from a year earlier, the weakest expansion since June 2012 and down from 1% annual growth in October.

The data covers a politically turbulent period in Britain and does not capture some private-sector surveys that suggested a recovery in sentiment after Prime Minister Boris Johnson’s election win on Dec. 12.

It also follows recent comments from Bank of England policymakers that raised the prospect of rate cuts to boost the economy.

BoE Governor Mark Carney and two other rate-setters, Silvana Tenreyro and Gertjan Vlieghe, said in the past week that a rate cut could be needed if economic assumptions prove over-optimistic.

The pound began its slide in Asia on Monday and extended its drop after the data. It was last down 0.7% at $1.2981, on track for its biggest daily loss in nearly two weeks.

The pound has fallen more than 2% in the opening weeks of the year.

Against the euro, sterling fell to a three-week low at 85.82 pence and was last down 0.75% on the day.

“We’ve seen the probability of rate cuts going up smartly this morning and the data amplifies that risk, so it’s no surprise that sterling is the laggard in currency markets today,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets in London.

“The BoE narrative and the economic data are adding to a perception that a rate cut is coming.”

Policymaker Vlieghe’s comments on Sunday were the latest sign that the BoE is concerned about weakness in the British economy and the need to act soon.

(Graphic: GBP futures - here)

RATE EXPECTATIONS

Bond markets have ramped up expectations of a rate cut in the coming weeks. Money markets forecast a 50% probability of a cut by the end of January and 85% probability of a cut in May.

Interest rate futures rallied as traders bought contracts across the board, betting on imminent rate cuts. December 2020 contracts rallied the most. <0#FSS:>

The rate-cut speculation was also reflected in a fall in British gilt yields on a day when U.S. and euro zone government bond yields rose.

“We think the Bank of England will cut rates this month, Brexit uncertainty will get worse, not better, and the economy is likely to fall into recession,” said George Saravelos, global head of FX research at Deutsche Bank.

BoE policymaker Tenreyro on Friday said that the economy was more likely to undershoot than overshoot the BoE’s last forecast in November. The next forecast will be published alongside the BoE’s rate decision on Jan. 30.

Hedge funds, however, have increased their bullish sterling positions to their biggest in more than a year and a half, latest positioning data shows.

BMO’s European head of FX strategy, Stephen Gallo, said investors should consider buying the dip in the pound as weak economic data is effectively “old news”, headwinds from Brexit are fading for now and the possibility of looser central bank policy is growing.

(Graphic: GBP positions - here)

Reporting by Saikat Chatterjee and Dhara Ranasinghe; Additional reporting by Sujata Rao; Editing by Larry King and David Goodman

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