Pound Declines on High Inflation Outlook

The inflation expectation of UK has increased to the highest value in last 4 years as investors are speculating that the Bank of England will add further stimulus or quantitative easing, thereby, sacrificing the 2% percent target for spurring the country’s economy. Pound has already declined to the lowest level against the greenback since June, 2010. As far as latest data released is concerned, the industrial and manufacturing production have surprisingly gone down in the month of January. When it comes to Euro, Sterling has declined against it for the 2nd straight day now. On the other hand, the UK gilts have increased after announcement of the Royal Institution of Chartered Surveyors that house prices have declined in last month. The 2-year British yields have declined to the lowest value in last 7 months.

According to the Fixed Income strategist of Bank of America Merrill Lynch, John Wraith, many investors are nervous as they feel that the British Government is on the verge of giving the Central Bank a freer remit, which is an indication that inflation is set to get higher. Wraith added that if quantitative easing makes a comeback, remit is reviewed and Pound declines further, higher breakeven is most certain to happen.

The 10-year break-even rate of UK is currently at 3.35%, after increasing by 6 basis points. Earlier, it touched 3.36%, its highest value since September, 2008. Incidentally, it measures yield difference between the British gilts and the index-linked securities.

The 10-year gilt yield of UK has gone down by 5 basis points and is currently at 1.96%. On the other hand, the 1.75% bond scheduled to mature in September, 2022 increased by 0.45 and is currently at 98.165. The rate on the 2-year gilts has declined to 0.18%, its lowest since 28th September.

Pound has declined by 0.2% on today and is currently priced at $1.4880. Incidentally, it had slid down to $1.4832 at one point of time, marking its lowest value since 23rd June, 2010. Against Euro, Sterling has tumbled by 0.1% and is priced at 87.58 pence per Euro now. On 25th February, Sterling reached 88.15 Pence per Euro, its weakest value since 28th October, 2011.

Last week, the asset-purchase target was kept at 375 billion Pounds by the Monetary Policy Committee of UK. The next policy meeting will take place between 3rd and 4th April.