Pound Drops as Expectations of Interest Rate Increases Wanes

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Pound Drops as Expectations of Interest Rate Increases WanesThe pound retreated the most in four months versus the U.S. dollar last week as investors slowly lost confidence that the Bank of England may hike borrowing costs sooner than expected.

The pound plunged under $1.70 level for the first time in four weeks after retail sales grew less than expected, while investor expectation of imminent interest rate hike dampened. The pound fell 0.7 percent to trade at $1.6970 as of 5 p.m. in London on Friday, its steepest weekly drop since March 21. The U.K. currency touched $1.7192 on July 15, its strongest level since October 2008. The sterling remained slightly unchanged at 79.14 pence per euro.

“We have now seen the break of the psychological $1.70, which is key,” Lee McDarby, a London-based executive director of U.K. corporate foreign-exchange sales at Nomura International Plc told Bloomberg. “The retail-sales figures highlight the fact that maybe the pound has been a little bit overbought in 2014. Anything other than great news seems to be viewed as bad news for the pound right now.”

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The yield on the target 10-year gilts remained slightly unchanged at 2.57 percent. The rate fell to 2.54 percent on July 23, its weakest level since May 29. The drop was fuelled by last week comments by the Bank of England Governor Mark Carney that interest rate hikes will remain restrained as the British economy remained confronted by “extraordinary forces”.

The BOE minutes of its July monetary committee meeting that were published on July 23 showed that officials would base their future inflation outlook on wages. Data released last week indicated that wages minus bonuses grew by the weakest pace since 2001 in the three months through May.To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.

To contact the reporter of this story; Jonathan Millet at john@forexminute.com