Bloomberg News

Pound Approaches One-Month Low as Retail Sales Slow; Gilts Gain

January 08, 2013

The pound fell toward the weakest level in a month against the dollar after an industry report showed U.K. retail sales slowed in December, adding to signs Britain’s economy is lagging behind U.S. growth.

Sterling weakened versus all except one of its 16 major counterparts before a Bank of England meeting this week at which policy makers are forecast to keep interest rates at a record low as it struggles to stoke a recovery. The U.K. economy shrank 0.1 percent last year, while the U.S. expanded 2.2 percent, according to analyst forecasts compiled by Bloomberg. Gilts rose, with the 10-year yield falling the most in a week, as investors sought safer assets.

“U.S. growth is outperforming U.K. to such an extent that the last time we saw this kind of a differential was pretty much in the 1980s,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “Definitely you’ll see lower levels in cable over the course of the year,” he said, referring to the pound-dollar exchange rate.

The pound fell 0.5 percent to $1.6037 at 4:24 p.m. London time after declining to $1.6010 on Jan. 4, the lowest level since Dec. 7. The U.K. currency depreciated 0.1 percent to 81.45 pence per euro after dropping to 81.62 pence, the weakest since Dec. 31.

Sterling has fallen 1 percent in the past week, the worst performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. It gained 2 percent last year.

Retail Sales

Retail-sales growth at U.K. stores open at least a year slowed to 0.3 percent last month from a year earlier, from 0.4 percent in November, the British Retail Consortium said. Economists surveyed by Bloomberg forecast growth of 0.5 percent.

The Bank of England will keep its benchmark rate at 0.5 percent and the asset-purchase target at 375 billion pounds on Jan. 10, separate Bloomberg surveys show.

“It’s a tough economic environment that we’re in,” Prime Minister David Cameron said on BBC Television’s “Andrew Marr Show” on Jan. 6. “Right now, Britain needs low interest rates.”

The pound will weaken to $1.60 and strengthen to 80 pence per euro by year-end, according to median estimates of analyst estimates compiled by Bloomberg.

Forecasting sterling against the 17-member common currency is difficult given the economic risks in both regions, but the pound may benefit from Bank of England policy, said Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon Corp. (BK:US) in London.

Sterling ‘Underpinned’

“We believe cable will fall this coming year or over the course of the next few months,” Mellor said. “Euro-sterling is a little bit harder to pinpoint, but in the end it comes down to the simple fact sterling is underpinned by a central bank with independent monetary policy.”

The 10-year gilt yield dropped six basis points, or 0.06 percentage point, to 2.03 percent after falling as much as seven basis points, the biggest decline since Dec. 27. The 1.75 percent bond due in September 2022 gained 0.50, or 5 pounds per 1,000-pound face amount, to 97.58.

The Debt Management Office sold 1.5 billion pounds of 4.75 percent bonds due in December 2030 today at an average yield of 2.786 percent, compared with 2.586 percent at the previous auction of the securities on July 3. Investors bid for 1.83 times the amount allotted, versus 2.06 times in July.

Buy Gilts

Investors should buy 2 percent gilts due in January 2016, according to Scotiabank analysts Alan Clarke, Frederic Pretet and Rajae Bouhdadi.

“Given the decent sell-off that we have seen at the start of 2013, the three-year to five-year sector in gilts is now looking attractive,” the analysts wrote today in a note to clients. The 2016 gilt “is particularly noteworthy as this month its maturity will drop below three years, which may lead to increased demand from central banks.”

The securities rose for a second day, with the yield falling five basis points to 0.61 percent.

Gilts handed investors a loss of 1.8 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds fell 1.3 percent and Treasuries slid 0.7 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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


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