Bloomberg News

Pound Drops Below $1.60 for First Time Since April; Gilts Jump

June 23, 2011

June 23 (Bloomberg) -- The pound fell below $1.60 for the first time since April 1 as a U.K. retail-sales index dropped to the weakest in a year, bolstering the case for the Bank of England to hold interest rates steady.

The yield on the 10-year British gilt slid to an eight- month low as investors sought the safest fixed-income assets around the world. The Confederation of British Industry’s retail gauge fell to minus 2 from 18 in May, with stores expecting demand to be “flat” in July. Minutes released by the central bank yesterday showed more policy makers voted to keep rates at a record low this month, while some saw the possibility of more stimulus amid “downside” risks to growth.

“It’s the reaffirmation yesterday that U.K. interest rate hikes are further off than people were expecting them to be,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Good news in terms of data would only be temporary. You still have to come back to fundamentals. The market is clearly supporting anyone who is actively moving interest rates, and I don’t know that that will happen in the U.K. for a while.”

The pound dropped below its 200-day moving average for the first time since January, weakening 0.6 percent to $1.5978 at 4:40 p.m. in London. Sterling strengthened 0.8 percent to 88.65 pence per euro and slipped 0.4 percent against the Japanese currency at 128.54 yen.

Shoppers Squeezed

British shoppers are being squeezed as inflation outpaces wage growth and the government implements the deepest budget cuts since World War II to reduce the deficit. Consumer price inflation was 4.5 percent in May, more than twice the central bank’s target.

For the majority of the nine-member Monetary Policy Committee, “fiscal challenges in the euro-area periphery highlighted the potential for further adverse shocks to demand,” according to minutes of the June 8-9 meeting. “For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialized.”

Short-sterling futures rose as bets on higher borrowing costs were reduced. The yield on the June 2012 contract fell one basis points to 1.11 percent, extending yesterday’s decline.

The U.K. currency slid to a record low 1.3358 against the Swiss franc, which tends to strengthen when investors seek security.

Gilts Advance

“With sterling at new real-term lows, and the markets now pricing no U.K. rate hike until August 2012, the downside is looking increasingly limited and potential for sterling gains on good news has significantly increased,” wrote Adrian Schmidt, a currency strategist at Lloyds Bank Corporate Markets in London.

U.K. government bonds advanced, pushing the yield on the 10-year gilt five basis points lower to 3.15 percent, the lowest since Nov. 12. The two-year note yield also declined five basis points, to 0.71 percent.

Gilts outperformed German bonds this year, handing investors a 2.8 percent return compared with a 0.4 percent gain from bunds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries have returned 3.3 percent in the same period.

The U.K. sold 450 million pounds of March 2050 inflation- linked bonds, with investors bidding for 2.17 times the securities on offer.

--With assistance from Matthew Brown in London. Editors: Mark McCord, Matthew Brown

To contact the reporter on this story: 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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