Bloomberg News

Pound Declines Most Since June on Growth Outlook, EU Speculation

January 19, 2013

The pound had its steepest weekly drop against the dollar since June on concern the U.K. economy is struggling to expand and as growing investor confidence in the euro-area damps demand for the currency as a haven.

Sterling tumbled for a second week versus the euro as excerpts from a planned speech by Prime Minister David Cameron raised speculation Britain may move closer to exiting the 27- nation European Union. Data this week showed retail sales declined and inflation held at the highest rate since May last month, adding to concern the U.K. will lose its top credit rating. Gross domestic product contracted in the fourth quarter, according to economist estimates before the data next week.

“There’s been a general raft of bad data, combined with nervousness ahead of the GDP and threats to the AAA rating,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “We are seeing huge volumes on the trading side so far this year. Sterling is looking sick into next week’s data.”

The pound fell 1.7 percent to $1.5861 in the week to 5:46 p.m. London time yesterday, after sliding to $1.5854, the lowest level since Nov. 16. The U.K. currency lost 1.5 percent to 83.83 pence per euro after depreciating to 83.95 pence, the weakest since March 28.

The 10-year gilt yield slid seven basis points, or 0.07 percentage point, to 2.01 percent, the biggest weekly decrease this year. The price of the 1.75 percent bond maturing in September 2022 rose 0.61 or 6.10 pounds per 1,000-pound face amount, to 97.72.

The U.K. currency dropped as much as 0.9 percent against the dollar yesterday, its biggest intraday tumble in two weeks. The U.K. is rated AAA with negative outlook by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

Rating Cuts

Rating cuts don’t always signal that bond prices will fall. About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974.

Sterling slid against all but two of its 16 major peers this week amid concern that the U.K. economy contracted at the end of last year. GDP fell 0.1 percent from the third quarter, according to the median of 36 estimates in a Bloomberg survey before the Jan. 25 report.

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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