* Anticipation rates will stay low to weigh on sterling
* More betting through options on sterling weakness
* Some banks expect pound to drop below $1.50
By Anirban Nag
LONDON, June 28 (Reuters) - Mark Carney's arrival as Bank of
England governor on July 1 could herald further weakness in the
pound as he is expected to signal within weeks a prolonged
period of low interest rates.
Carney, formerly head of the Bank of Canada, has been asked
by finance minister George Osborne to report in early August on
the merits of announcing milestones the UK economy that would
signal monetary policy could be changed - effectively forward
guidance on interest rates.
With Britain's economy recovering at a record slow pace and
expected to lag U.S. growth, this could see sterling weaken
further against the dollar.
The pound has lost more than 5 percent against the dollar
and euro this year.
Investors in the options market have been betting on a
weaker pound for much of the year but with Carney's arrival
imminent, they have been emboldened to place even larger bets
that it will drop to $1.50 by mid-July from around $1.5250
currently. Some banks expect a fall to $1.43 by year end.
Having the BoE give an outlook for monetary policy would
bring it into line with the U.S. Federal Reserve, which this
month outlined a possible timetable for slowing its bond-buying
stimulus programme. Carney introduced forward guidance at the
BoC in 2009.
"Carney will pursue forward guidance, which is a method of
telling markets that rates will remain low for long," said Alvin
Tan, currency strategist at Societe Generale. "We are expecting
the pound to drop to $1.43 by year-end as the U.S. economy is
expected to do much better."
Reflecting that, the yield gap between 10-year U.S.
Treasuries and British gilts is near
its widest in seven years in favour of Treasuries.
The Fed's signal led to a sell-off in bond markets with UK
short-term rates edging up in sync. The British economy grew 0.3
percent in the first in the first quarter after two years of
stagnation but data showed on Thursday that output is still 3.9
percent below its pre-recession peak.
As such, the UK can ill afford higher interest rates and a
minority of Monetary Policy Committee members favour more BoE
"The risk that the BoE chooses a more active form of forward
guidance to keep policy loose is not priced into cable at
current levels," said UBS chief currency strategist Mansoor
Mohiuddin. UBS sees the pound at $1.47 in three months.
A Reuters poll published on Wednesday showed economists
expect no changes to monetary policy at Carney's first MPC
meeting next week. The poll gave a median 40 percent chance the
BoE would top up the 375 billion pounds it has so far pumped
into the economy before the end of this year.
That median has been steadily falling in recent polls as UK
economic data showed that the worst was probably past.
Nevertheless, the minutes of the meeting, to be published on
July 17, will be closely watched for clues to whether Carney
voted for more asset purchases. This explains why some hedge
funds are betting on a weaker pound around that time.
"Investors would be quick to focus on the MPC minutes
looking for indications of further easing ahead. Against this
background sterling short would remain attractive," said
Valentin Marinov, currency strategist at Citi.
Carney is expected to detail the "forward guidance" plan
with the Quarterly Inflation Report on Aug. 7.
"There are huge expectations that Carney can deliver on the
next wave of growth," said Howard Jones, partner at RMG Wealth
Managers. "We are not sure what he can do to lift growth. We
remain short sterling/long dollar for a drop to mid-$1.40s."