Bloomberg News

Pound Weakens, Gilts Jump on Signs U.K. Economic Growth Slowing

June 10, 2011

June 10 (Bloomberg) -- The pound weakened versus the dollar and 10-year gilts headed for their longest streak of weekly gains on record as a report showed U.K. manufacturing output fell more than forecast, reducing the case for higher rates.

Sterling fell against most of its 16 major peers tracked by Bloomberg, dropping for a third day versus the dollar. Factory output contracted 1.5 percent in April after rising 0.2 percent in March, the Office for National Statistics said today. Economists predicted a 0.1 percent decline, according to the median of 24 estimates in a Bloomberg survey. Overall industrial output, which includes mining, quarrying and utilities, fell 1.7 percent on the month.

“The industrial production and the manufacturing production data massively disappointed,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “The initial move lower in the pound was amazing. It will take a big turnaround in sentiment to get investors back on sterling’s side with no interest-rate hikes expected by our economists until November.”

The pound fell 0.7 percent to $1.6245 as of 4:41 p.m. in London. It fell as low as $1.6218, the weakest since May 25. Sterling was 0.3 percent weaker at 88.37 pence per euro and weakened 0.9 percent to 130.36 yen.

The yield on two-year U.K. government notes fell four basis points to 0.82 percent, after reaching 0.8 percent, the least since Nov. 10. The 10-year yield slid five basis points, to 3.23 percent, set for a ninth-straight weekly decline, the longest streak since Bloomberg began collecting the data in 1989.

‘Negative’ Momentum

April’s extra public holiday for the royal wedding hurt orders and the impact of the Japanese earthquake hit supplies, the data revealed. A separate report showed prices at factory gates rose 0.2 percent in May, the least since September.

Acadametrics Ltd. and LSL Property Services Plc today said house prices were little changed in May, as concern the economic recovery is slowing damped buyer confidence. The FTSE 100 Index of shares slipped 0.2 percent, falling 2.5 percent this month.

“There’s a momentum on the U.K. side that has been generally negative,” said Sebastien Galy, a senior foreign- exchange strategist at Societe Generale SA in London. “Equity markets are continuing to underperform and sterling is a bit more exposed in a risk-off environment.”

Sterling headed for a second-straight weekly drop against the dollar as speculation mounted that the central bank will be obliged to keep interest rates on hold as government spending cuts crimp growth. The Bank of England yesterday kept its benchmark interest rate at a record-low 0.5 percent, as predicted by all 55 economists in a Bloomberg News survey.

Interest-Rate Bets

UniCredit SpA put under review its forecast for the first Bank of England rate increase to come in August after “today’s very weak figures,” economists Mauro Giorgio Marrano and Chiara Corsa said today in an e-mailed note.

Investors pushed back bets on the next Bank of England interest-rate increase to May, forward contracts on the sterling overnight interbank average show. As recently as yesterday, traders were betting on an increase in April, data from Tullett Prebon Plc showed.

Short-sterling futures advanced, signaling investors trimmed wagers on higher central bank borrowing costs. The implied yield on the contract expiring in June 2012 slipped five basis points to 1.17 percent.

The U.K. plans to sell 4 percent gilts maturing in January 2060 through banks in the week beginning June 27, the Debt Management Office said today. It also plans to sell 0.5 percent index-linked gilts due March 2050 in the week commencing June 20, the debt agency said on its website.

--With assistance from Emma Charlton and Keith Jenkins in London. Editors: Mark McCord, Matthew Brown

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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