Reuters: US Dollar Report: UPDATE 1-Sterling plunges as BoE guides against higher rates

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UPDATE 1-Sterling plunges as BoE guides against higher rates Jul 4th 2013, 13:35 Tweet Share this Email Print Thu Jul 4, 2013 9:35am EDT * Sterling slides after BoE highlights concerns on rising gilt yields * BoE surprises markets by issuing statement * Signals forward guidance could come in August By Anooja Debnath LONDON, July 4 (Reuters) - Sterling plunged and UK stocks and government bonds rose on Thursday after the Bank of England surprised markets by voicing concern that rising gilt yields were not warranted by the state of the British economy. While the BoE kept interest rates and the extent of its bond-buying unchanged at its first policy meeting under new governor Mark Carney, markets were caught unawares by the central bank issuing a statement and signalling it could give forward guidance on interest rates next month. Sterling slipped 1.3 percent to a low of $1.5060, its weakest since late May, and was on track for its worst daily performance since December 2011. The euro rose more than 1 percent against the pound to a 2-1/2 month high of 86.34 pence before paring gains. "The timing of the BoE statement was somewhat surprising and this could keep sterling under pressure across the board," said Valentin Marinov, head of European G10 FX strategy at Citi. "The statement is a continuation of the dovish bias that was communicated by the previous BoE governor, Mervyn King, and his colleagues at the MPC ... they had highlighted the risks emanating from premature tightening in the financial market conditions." Ten-year gilt prices surged after the BoE announcement and yields slid 7 basis points to stand 5 bps lower on the day at 2.35 percent at 1130 GMT. Benchmark 10-year yields rose almost a percentage point between early May and late June - an effective policy tightening. Short sterling rate futures - which reflect BoE rate expectations - were up strongly across the strip, with March 2014 contracts up 9 ticks to 99.38 and September 2015 contracts as much as 17 ticks higher. "We're seeing a big repricing of rate expectations across the market," said Shahid Ladha, gilts strategist at BNP Paribas. Tighter monetary conditions could threaten Britain's nascent economic recovery, which seems to be taking hold in the second quarter after a recent string of positive data. The FTSE 100 stocks index was up 2.6 percent, at 6,404.99 points, hitting three-week highs and on track for its biggest one-day gain since late 2011. Sterling's rise has also been limited against the dollar, which has been supported by expectations that the U.S. Federal Reserve could pare back its bond-buying programme. The yield spread between 10-year U.S. Treasuries and UK gilts moved towards recent seven-year highs in the dollar's favour. Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (0) Be the first to comment on reuters.com. Add yours using the box above.

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