British Pound logs weekly decline

Pound Logs Weekly Decline; Investors Scale Back Rate Forecasts
By Lukanyo Mnyanda
May 19 (Bloomberg) -- The U.K. pound fell for a fourth week against the dollar, its longest losing streak in 15 months, as investors scaled back expectations of rate increases this year.
The pound also declined for a second week against the euro after inflation slowed last month and the central bank said in a quarterly report the outlook for prices was ``unusually uncertain.'' The pound extended declines as a report yesterday showed retail sales unexpectedly fell in April, prompting investors to reduce bets the bank will raise rates.
``In the short term, sterling will come under further pressure,'' said Ian Stannard, a currency strategist at BNP Paribas SA in London. ``Over the coming months, we could see a further scaling back of rate hike expectations.''
Against the dollar, the pound fell 0.4 percent this week and was trading at $1.9730, the lowest since April 11, by 4 p.m. yesterday in London. The pound traded near a two-month low versus the euro, and was recently at 68.37, from 68.26 on May 11.
Retail sales fell 0.1 percent in April, compared to a 0.3 percent gain in March. Economists had forecast a 0.6 percent increase, according to a survey by Bloomberg News.
Slower sales led investors to lower bets the bank will raise interest rates two more times this year, futures prices show, reducing the appeal of assets denominated in pounds.
The implied yield on the September interest-rate futures contract fell 1 basis point to 5.96 percent. The yield on the December contract also declined 1 basis point, to 6 percent. The contracts settle to the three-month London interbank offered rate for the pound, which has averaged 15 basis points more than the central bank's benchmark for the past decade.
`Outlook Dented'
``The short-term outlook has been dented by the retail sales,'' said Steven Barrow, chief currency strategist at Bear Stearns International Ltd. in London. ``It's a setback for the pound.''
Inflation will slow to about 1.8 percent by the middle of 2008, the Bank of England said in a quarterly report this week, after rising to more than 1 percentage point above the bank's 2 percent target in March.
``The big picture is still for steady growth with low inflation once we move through the period of volatility in energy prices,'' Bank of England Governor Mervyn King said on May 16. Inflation is likely to ``settle around the target.''
The central bank increased its benchmark rate to a six-year high of 5.5 percent on May 10. It has raised borrowing costs four times since August to tame inflation which has quickened to a decade-high.
Gains by the pound may be limited because of expectations that Europe's second-largest economy, which last year grew the quickest in two years, will continue creating jobs, which may boost spending and inflation.
Public Sector
A government report due on May 21 may also show the healthiest public sector finances in three months, economists surveyed by Bloomberg predicted.
The report will probably show the public sector had a 1.5 billion-pound ($2.96 billion) surplus in April, the first surplus since January, economists predicted. In March, the public sector needed to borrow 17.2 billion pounds.
``I'm still relatively keen on sterling,'' said Chris Furness, head of currency strategy at 4CAST Ltd. in London. ``We expect the rate differential to move in favor of the pound.''
The yield on the benchmark 10-year gilt rose 5 basis points on the week to 5.14 percent. The price of the 4 percent gilt due September 2016 fell 0.32, or 3.2 pounds per 1,000-pound ($1,972) face amount, to 91.63. Bond yields move inversely to prices.