Bloomberg News

Pound Drops Against Euro on U.K. Growth Concern; Gilts Decline

October 06, 2012

The pound fell for the first time in three weeks against the euro as evidence the U.K. economy is struggling to grow damped demand for the nation’s assets.

The pound was little changed against the dollar after dropping to the lowest in more than three weeks. An Oct. 3 report showed a gauge of U.K. services rose at a slower pace than economists forecast last month, while the nation’s manufacturing industry shrank for a fifth month in September, according to separate data on Oct. 1. Government bonds fell after the U.S. employment rate unexpectedly slid to the lowest level in almost four years.

“Euro-pound has definitely broken lower out of its range,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “The U.K. economy is not great. The pound doesn’t seem to have many friends right now.”

The pound was at 80.61 pence per euro at 5 p.m. London time yesterday, down 1.3 percent since Sept. 28. It fell to 80.67 pence yesterday, the weakest since Sept. 18. Sterling traded little changed at $1.6194, after touching 1.6067 on Oct. 3, the least since Sept. 12.

The Bank of England kept its benchmark interest rate unchanged at a record-low 0.5 percent at a monthly policy meeting on Oct. 4, in line with the estimate of all 50 analysts surveyed by Bloomberg News. The central bank also maintained its bond-purchase target of 375 billion pounds.

U.S. Unemployment

The 10-year gilt yield rose four basis points, or 0.04 percentage point, from last week to 1.77 percent even after falling to 1.679 percent on Oct. 4, the lowest since Sept. 10. The 1.75 percent bond due in September 2022 fell 0.39, or 3.90 pounds per 1,000-pound face amount, to 99.815. The yield on two- year gilts rose two basis points to 0.21 percent.

The U.S. jobless rate dropped to 7.8 percent in September from 8.1 percent the previous month and the economy added 114,000 workers after a revised 142,000 gain in August that was more than initially estimated, according to Labor Department figures yesterday.

The pound will weaken to 78 pence per euro by the end of this year, McDarby said, citing Investec’s forecast.

A report will show manufacturing production in the U.K. dropped 0.7 percent in August, compared with a 3.2 percent rise in July, according to the median estimate of 25 analysts before the data is released Oct. 9. The U.K. is scheduled to sell 1.75 billion pounds of gilts due in June 2032 the same day, before a 1.5 billion-pound sale of inflation-linked bonds maturing in March 2024 on Oct. 11.

The pound rose 0.7 in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 1.8 percent and the dollar slumped 3.9 percent.

Gilts returned 3.3 percent this year through Oct. 4, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.2 percent and U.S. Treasuries rose 2.1 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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


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