Sterling slips to one-month low, pulled down by UK housing data

A tick up in US Treasury yields and more signs of weakness in Britain’s housing market pushed sterling back below $1.30 on Thursday to its lowest in a month, down just over a third of a per cent on the day.

Dealers said volumes were limited, but the latest report from the Royal Institute of Chartered Surveyors added to evidence that the British economy was slowing, which has weighed on the pound since June's vote to leave the European Union.

Sterling, which has fallen almost 3 per cent since the Bank of England announced a package of policy easing last week, dropped 0.35 per cent to $1.2967 and 86.20 pence per euro, its lowest against both since the second week of July.

The wealth management arm of Switzerland's UBS was the latest to cut its forecasts for sterling over the next three months, predicting a fall to $1.25.

“In our view, it is very likely that further monetary easing will be delivered in the coming months, which would weaken sterling,” UBS strategists Constantin Bolz and Thomas Flury said in a note.

“However, the fact that the BoE almost ruled out negative rates will, in our view, prevent GBPUSD from falling below 1.20, as gilts will continue delivering a positive yield compared to many European and Japanese government bonds.”

House prices

The RICS survey showed housing market activity slowed in the month following the Brexit vote, with gauges of house price growth and transactions falling to their lowest in years.

That followed signs from the Bank of England’s regular survey of its regional agents which backed the bank’s view that the economy was set to slow. The first post-Brexit vote readings on inflation, retail sales and the labour market are all due next week.

“There is a risk upcoming data shows the Bank of England were too optimistic for marginal positive growth for H2 2016 and further easing is required this year,” said James Ruddiman, a director with London-based Audere Solutions.

“The uncertainty and future easing expectations should keep the pound on a downward trend.”

Gilt yields, down sharply this week as the impact of the BoE’s new programme of bond-buying sinks in, were a touch higher. But the read-across to sterling for the moment is seen as minimal.

Long gilt yields

“For the moment we can make sterling distinct from long gilt yields, which are really moving in tandem with the global squeeze,” said Javier Corominas, head of economic research and FX strategy at Record Currency Management in London.

“The next question is whether the Bank of England cuts rates again to 10 basis points - that might be another leg down in sterling. The problem is that the data is conflicting and I don’t think the bank has made its mind up.”

Reuters