Bloomberg News

Pound Slides Most in Six Months Versus Euro as U.K. GDP Shrinks

July 25, 2012

The pound slumped the most in six months against the euro after a U.K. report showed the economy shrank more than analysts forecast last quarter.

Two-year gilt yields fell to an all-time low as the data fueled speculation the Bank of England will increase asset purchases to reignite growth after boosting them by 50 billion pounds ($77.4 billion) at its July meeting. The U.K. currency weakened against all except two of its 16 major counterparts as a survey compiled by the Confederation of British Industry showed U.K. manufacturing confidence dropped in July.

“We were primed for a poor number but this is dreadful,” said Nick Parsons, head of research for the U.K. and Europe at National Australia Bank Ltd. (NAB) in London. “We forecast a cut in U.K. interest rates by the end of the year and more quantitative easing is going to be needed,” he said, referring to central bank asset purchases.

The pound tumbled 0.7 percent to 78.35 pence per euro at 4:28 p.m. London time after falling as much as 1 percent, the biggest intraday decline since Jan. 12. The U.K. currency rose to 77.55 pence on July 20, the strongest since October 2008. Sterling fell 0.3 percent to $1.5467.

Gross domestic product shrank 0.7 percent from the first quarter, when it contracted 0.3 percent, the Office for National Statistics said. Economists surveyed by Bloomberg forecast a 0.2 percent decline. A quarterly gauge of factory optimism fell to minus 6 from 22 in April, the CBI said. Hiring intentions slid to minus 2 from 16, the lowest since October.

The U.K. currency has fallen 0.4 percent in the past week, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar gained 0.9 percent, and the yen jumped 1.7 percent.

Euro Boost

The euro was boosted today after European Central Bank council member Ewald Nowotny said there were arguments in favor of giving the region’s rescue fund a banking license in order to increase its firepower.

Moody’s Investors Service cut its outlook for the U.K. credit rating to negative on Feb. 13, saying Britain risked losing its top grade if the economy deteriorates. Fitch lowered its outlook for the nation to negative on March 14.

“As long as the U.K. data continues to disappoint, we see risks for a sterling downside correction increasing,” said Valentin Marinov, head of Group of 10 foreign-exchange strategy at Citigroup Inc. in London. “One of the key reasons why people have been buying gilts was the AAA rating of the U.K. sovereign. If that’s gone, it could undermine sterling.”

Record Low

The two-year gilt yield dropped two basis points, or 0.02 percentage point, to 0.07 percent after falling to a record 0.047 percent. The 2.25 percent note due in March 2014 advanced 0.02, or 20 pence per 1,000-pound face amount, to 103.53.

The 10-year bond yield declined one basis point to 1.46 percent after sliding as much as three basis points. It set an all-time low of 1.407 percent on July 23.

The Bank of England’s Monetary Policy Committee raised its asset-purchase target to 375 billion pounds on July 5 and said the purchases will take four months to complete. The next policy decision will be announced on Aug. 2.

U.K. government debt has returned 4.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds advanced 4.1 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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