Bloomberg News

Pound Weakens on Signs European Leaders Are Split on Debt Plan

October 20, 2011

Oct. 20 (Bloomberg) -- The pound weakened against the dollar and yen as signs of a split among the European leaders on a plan to resolve the debt crisis drove investors to seek out safer investments.

Sterling fell versus 12 of its 16 major counterparts as Germany and France disagreed over the role of the European Central Bank which has rejected using its balance sheet to bolster the 440 billion-euro ($602 billion) European Financial Stability Facility. The pound briefly reversed losses as a draft document showed the bailout fund may be authorized to provide additional funds to nations such as Italy and Spain. Gilts were little changed.

The pound move “is all euro-zone driven,” said Chris Walker, a currency strategist at UBS AG in London. “Over the next one-to-three months I could see sterling pushing to between $1.55 and $1.50.”

The pound weakened 0.5 percent to $1.5692 at 4:174 p.m. London time, after rising as much as 0.2 percent. Sterling depreciated 0.4 percent to 120.63 yen, and was little changed at 87.17 pence per euro.

The pound has declined 0.8 percent in the past six months and 2.9 percent in the past year, according to Bloomberg Correlation-Weighted Indexes, which measure a basket of 10 developed-market currencies.

The German government doesn’t rule out postponing a summit planned for Oct. 23 due to stalling negotiations about the so- called leveraging of the EFSF, Die Welt reported, citing unidentified people close to the country’s governing coalition.

‘Spike Higher’

“It may be that we do see the euro attempting to spike higher on any signs that progress is being made,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “Any positive European news is going to see euro” moving toward the top end of its trading range against the pound, he said.

The pound may weaken to $1.50 within three months as it runs into so-called resistance, Commerzbank AG said, citing trading patterns.

The U.K. currency will seen its gains versus the greenback capped as it reaches its 55-day moving average and the 50 percent Fibonacci retracement of its decline from an April high, said Karen Jones, a London-based technical strategist at the German bank.

The 10-year gilt yielded 2.46 percent. The price of the 3.75 percent security maturing September 2021 was little changed at 111.24.

The U.K. sold 4.75 billion pounds of 1.75 percent notes due in January 2017 at an average yield of 1.547 percent, the Debt Management Office said. That’s up from 1.394 percent at the previous auction on Sept. 22. Demand rose to 1.7 times the amount on offer, from 1.2 times.

U.K. government debt has handed investors a return of 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing the 6.7 percent gain for German bunds.

-- With assistance from Emma Charlton in London. Editors: Nicholas Reynolds

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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