Tags: pound | UK | Goldman Sachs | rally

Pound's World-Beating Rally Becoming Burden, Goldman Sachs Says

Wednesday, 09 July 2014 07:36 AM

Having the past year’s best-performing major currency may become a burden for the U.K. economy, according to Goldman Sachs Group Inc.

After reaching the highest level since 2008 on July 7, a trade-weighted index of the pound fell for a third day today as a report showed shop prices tumbled by the most since at least 2006 in June. A gauge of inflation expectations dropped to a three-month low, adding to signs the strength of the currency may impair future growth.

“The currency is up on a trade-weighted basis almost 10 percent in the last year,” Kevin Daly, an economist at Goldman Sachs in London, said in an interview on Bloomberg Television’s “On The Move” with Manus Cranny. “That leads us to expect that while growth will remain strong, it will moderate to some extent as the year goes through.”

The pound declined 0.1 percent to 79.55 pence per euro at 11:56 a.m. London time. It touched 79.15 pence on July 7, the strongest level since September 2012. The U.K. currency slipped 0.1 percent to $1.7113. A trade-weighted index compiled by Deutsche Bank AG fell 0.1 percent to 84.3, after touching 84.71 two days ago.

The pound has climbed against all of its 16 major peers in the past year as investors bet the Bank of England will be the first major central bank to end extraordinary stimulus measures. While economists surveyed by Bloomberg predict the BOE will leave its benchmark rate at a record-low 0.5 percent tomorrow, derivatives markets show investors are betting on a 0.25 percentage point increase by February.

Inflation Bets

U.K. shop prices declined 1.8 percent in June from a year earlier, the British Retail Consortium said today. A report yesterday showed manufacturing unexpectedly slumped 1.3 percent in May from April, the biggest plunge in 16 months.

The five-year break-even rate, a gauge of market inflation expectations, fell to 2.815 percentage points today, the least since March 25.

Ten-year gilt yields were little changed at 2.63 percent. The price of the 2.25 percent bond maturing September 2023 was at 96.895.

Gilts returned 3.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 5 percent and Treasurys gained 3.1 percent.

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Having the past year's best-performing major currency may become a burden for the U.K. economy, according to Goldman Sachs Group Inc.
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Wednesday, 09 July 2014 07:36 AM
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