Bloomberg News

Pound Weakens as Slide in Consumer Confidence Boosts QE Outlook

May 11, 2012

The pound fell to three-week low against the dollar after an industry report showed U.K. consumer confidence dropped last month as the economy slipped into a double-dip recession.

Sterling slid for the first time in six days versus the euro as signs the economic outlook is worsening raised the prospect Governor Mervyn King will hint at resuming bond purchases, or quantitative easing, when the central bank releases its Inflation Report next week. Ten-year gilts advanced, completing a third weekly gain.

“The QE carrot is still dangling in front of the market should we get any more weak data,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “We’ve made a step-adjustment down in sterling being the pick of non-euro currencies to put money in.”

The pound dropped 0.4 percent to $1.6080 at 4:48 p.m. London time after falling to $1.6062, the lowest since April 20. It fell 0.4 percent this week. Sterling weakened 0.4 percent to 80.44 pence per euro, after rising to 79.97 pence, the strongest since November 2008.

Nationwide Building Society said its index of consumer sentiment worsened to 44 from 53 in March. A gauge of Britons’ outlook for the economy fell to 60 in April from 73 in March, the Swindon-based company said. A measure of whether it’s a good time to make a major purchase declined to 75 from 86.

The surveys were conducted before a government report on April 25 showed the U.K. economy shrank for a second quarter in the three months through March.

‘Not Off the Table’

The Monetary Policy Committee left its bond-purchase program at 325 billion pounds yesterday amid concern inflation is quickening. Unlike the last time it halted quantitative easing in February 2010, it didn’t issue a statement.

“The suspicion is that more QE may not have happened, but it’s not off the table by any stretch of the imagination,” Juckes said. “The economy is still weak. We’ll see more when we see the Inflation Report” on May 16, he said.

Sterling has appreciated 4.4 percent in the past three months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2.1 percent, and the euro dropped 0.2 percent.

The 10-year gilt yield fell two basis points, or 0.02 percentage point, to 1.96 percent after falling to a record 1.881 percent on May 9. The 4 percent bond due March 2022 rose 0.22, or 2.20 pounds per 1,000-pound face amount, to 118.1. The yield has declined three basis points this week.

Bill Sale

The Debt Management Office sold 1.5 billion pounds of six- month bills at an average yield of 0.4256 percent. Investors bid for 2.97 times the amount allotted, up from a so-called bid-to- cover ratio of 2.45 on May 4. The office also sold one- and three-month securities.

Gilts have handed investors a loss of 0.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries gained 0.6 percent and German bunds returned 2.2 percent, the indexes show.

King may leave the door open to add more stimulus as a flare-up in Europe’s debt crisis and government spending cuts threaten to keep Britain’s recovery at bay, according to economists at Deutsche Bank AG and BNP Paribas SA.

“They’ll have no choice but to revise down their growth projections” in the Inflation Report, said George Buckley, an economist at Deutsche Bank in London. “They have a dilemma of high inflation and very weak growth, but you definitely can’t rule more QE out.”

David Tinsley, an economist at BNP Paribas in London, said the Inflation Report will present a “fairly dovish assessment” of the economy.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net

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


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