Bloomberg News

Pound Weakens as Retail Sales Report Spurs Stimulus Speculation

September 06, 2011

Sept. 6 (Bloomberg) -- The pound fell below $1.60 for the first time in almost two months as a report showed U.K. retail sales dropped in August, fueling speculation the Bank of England may embark on more stimulus measures as early as this week.

Sterling snapped four days of gains against the euro. Sales at stores open at least 12 months, measured by value, fell 0.6 percent from a year earlier, the British Retail Consortium said today. U.K. two-year gilts dropped as the European Central Bank was said to be buying bonds of some euro-area nations. The Bank of England is due to meet in two days’ time.

“It’s inevitable that there will be further QE ahead,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “That should keep the pound weaker long term against a broad spectrum of currencies.”

Sterling depreciated 1 percent to $1.5964 at 4:44 p.m. in London, adding to yesterday’s 0.6 percent loss. The pound traded below $1.60 for the first time since July 13. It was 0.4 percent weaker at 87.78 pence per euro.

The pound has weakened 6 percent in the past 12 months against a basket of nine major peers, according to Bloomberg Correlation-Weighted Currency Indexes. Only the dollar has declined more, depreciating 9.7 percent.

U.K. gilts declined as speculation the ECB bought euro- region bonds sapped demand for safer assets.

Gilts Drop

Gilts halted a three-day advance, with the 10-year yield gaining one basis point to 2.30 percent. The two-year note yield rose five basis points to 0.58 percent, after dropping to a record low 0.49 percent yesterday.

“The ECB is said to be buying Spanish bonds, so there’s a little bit of support for the weaker markets, which takes a bit of the edge off the so-called safe-haven countries,” said Elisabeth Afseth, a fixed-income analyst at Evolution Securities Ltd. in London. “They might wait a little bit but the balance is clearly moving in favor of further QE at some stage.”

Gilts have handed investors a 10 percent return this year, compared with 7.4 percent from German debt and 8.3 percent from U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The bonds outperformed as data signaling the economic recovery was floundering fueled speculation the Bank of England will keep interest rates at a record low and may resume asset purchases, or quantitative easing, to boost the economy.

Traders bet the central bank will cut rates by 10 basis points over the next 12 months, according to a Credit Suisse Group AG index based on swaps.

--With assistance from Scott Hamilton in London. Editors: Mark McCord, Peter Branton

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@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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