Bloomberg News

Pound Falls After Services Growth Slows as Gilts Advance

July 04, 2012

The pound fell for a third day against the dollar after a report showed U.K. services growth slowed more in June than analysts forecast, boosting the case for the central bank to add additional stimulus.

Britain’s currency weakened against most of its 16 major peers after separate data showed shop-price inflation at its weakest in more than 2 1/2 years. The Bank of England will raise its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds tomorrow, according to the median estimate of analysts in a Bloomberg News survey. Gilts advanced as demand increased at a sale of 4.5 billion pounds of 1 percent notes due September 2017.

“Even the service sector is losing momentum and that’s not good for growth,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The Bank of England’s focus is shifting toward supporting growth. They will probably expand their gilt-purchase program tomorrow and the pound will continue to weaken.”

Sterling declined 0.6 percent to $1.5594 at 4:53 p.m. London time. It was little changed at 80.30 pence per euro.

The pound will depreciate to a two-year low of $1.50 over the next three months, Hardman predicted.

A gauge of services activity based on a survey of purchasing managers fell to 51.3, an eight-month low, from 53.3 in May, Markit Economics and the Chartered Institute of Purchasing and Supply said in an e-mailed report released in London. The median forecast of 25 economists in a Bloomberg News survey was for a reading of 52.9. A measure above 50 indicates expansion. Markit said respondents noted “fragile” demand.

Double-Dip Recession

U.K. retail prices rose 1.1 percent from a year earlier, compared with 1.5 percent in May, the British Retail Consortium and Nielsen Co. said in an e-mailed report today.

Reports by Markit this week showed U.K. manufacturing and construction contracted in June, while euro-area services and manufacturing output shrank for a fifth month. With both economies remaining weak, the Bank of England and the European Central Bank will probably loosen policy after meetings at the two institutions tomorrow, Bloomberg surveys of economists show.

While the Bank of England will probably raise its target for asset purchases, it will leave its key interest rate at a record low of 0.5 percent, the surveys show. The U.K. central bank will announce its decision at noon in London.

ECB Meeting

The pound has depreciated 0.6 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies, amid speculation Europe’s debt crisis is weighing on Britain’s economy. The euro weakened 1.9 percent and the dollar fell 2.1 percent, the indexes show.

ECB officials meeting in Frankfurt tomorrow will cut the benchmark rate below 1 percent to a record low of 0.75 percent and will also reduce the deposit rate to zero, according to a survey of economists.

Ten-year gilt yields fell four basis points to 1.72 percent. The 4 percent security gained 0.36, or 3.60 pounds per 1,000-pound face amount, to 120.23.

The U.K. debt management office sold notes maturing in September 2017 at an average yield of 0.942 percent, up from 0.927 percent the last time the securities were sold on June 12. Investors bid for 1.51 times the number of gilts allotted, up from 1.28 times at the last sale.

“The auction went relatively well and appetite for gilts remains strong,” said Peter Goves, an analyst at Citigroup Inc. in London. “The central bank actively extending its purchases introduces another buyer, so is supportive for gilts. We see yields remaining low.”

U.K. debt has returned 1.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 2.2 percent and U.S. Treasuries rose 1.8 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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


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