Pound Losses a ‘Knee-Jerk’ Reaction, Gains to Resume, HSBC Says

(Bloomberg) -- The pound’s losses against the dollar won’t last and the currency will resume gains on bets the Bank of England will raise interest rates before the U.S. Federal Reserve, according to HSBC Holdings Plc. Today’s decline, after a report showed U.K. manufacturing unexpectedly shrank last month, was a “knee-jerk” reaction, Paul Mackel, a director of currency strategy at HSBC in London, said in a telephone interview today. Britain’s currency will end the year at $1.62, before rising to $1.75 in 2010, he said.

The pound slipped as much as 0.5 percent to $1.6376, paring its gain against the dollar this year to 11.3 percent, after a survey by the Chartered Institute for Purchasing and Supply and Markit Group Ltd. showed an index of U.K. manufacturing dropped to 49.7 in August from 50.2 in July. Economists polled by Bloomberg had forecast an increase to 51.5. “For now, the market is looking for holes in the U.K. recovery story and today it found one, and that’s why they sold the pound,” Mackel said. “Longer term, the outlook remains positive, but that’s likely to be a story for 2010 when it becomes clear that the BOE is going to raise rates before the Fed.”

The U.K. currency, which tumbled 26 percent in 2008, gained this year as economic data indicated the worst of the recession is over, prompting speculation the Bank of England may increase its main interest rate from a record low 0.5 percent. Central bank data today showed mortgage approvals rose to the highest level in 15 months in July. Banks granted 50,123 home loans in July, compared with 47,891 in June, the central bank said. Economists predicted 50,100, according to the median of 26 forecasts in a Bloomberg News survey.