Bloomberg News

Pound Falls to 13-Month Low Versus Euro as U.K. Economy Shrinks

January 26, 2013

The pound fell for a third week against the euro, dropping to the least in more than a year, as data showed the U.K. economy shrank more than analysts forecast in the fourth quarter, tipping it back toward recession.

Sterling slid for a second week versus the dollar as Bank of England policy makers said the currency’s level may prove an obstacle to rebalancing the economy, which is on the brink of an unprecedented triple-dip recession. The euro strengthened after the European Central Bank said 137.2 billion euros of three-year loans granted to banks under the Longer-Term Refinancing Operations to avert the sovereign-debt crisis would be repaid early. Ten-year gilts fell, snapping a two-week advance.

“Things in the U.K. are deteriorating as shown by the downside surprise with the gross domestic product data this week,” said Gavin Friend, a foreign-exchange strategist at National Australia Bank in London. “A reasonable outcome from the LTRO repayment in the euro area and the weak numbers in the U.K. suggest the pound can fall further versus the euro.”

The pound fell 1.5 percent in the week to 85.17 pence per euro, at 5 p.m. London time yesterday, after sliding to 85.37 pence, the lowest level since Dec. 12, 2011. The U.K. currency lost 0.5 percent to $1.5799 after dropping to $1.5746 yesterday, the weakest since Aug. 21.

The 10-year gilt yield rose five basis points, or 0.05 percentage point, in the week to 2.06 percent. The price of the 1.75 percent bond maturing in September 2022 fell 0.39, or 3.90 pounds per 1,000-pound face amount, to 97.34.

MPC Vote

The Monetary Policy Committee voted 8-1 to keep their bond- purchase plan unchanged at 375 billion pounds, according to minutes of the Jan. 10 decision published in London on Jan. 23. Members diverged on the risks to the economy, with some saying there was scope for wages to pick up while others noted that the economy could grow faster without generating inflation. Bank of England Governor Mervyn King said on Jan. 22 the central bank is ready to provide more stimulus if needed.

A survey next week will show a gauge of U.K. manufacturing growth slowed this month to 51.0 from 51.4 in December, according to the median forecast of economists in a Bloomberg News survey.

Sterling has fallen 2.7 percent this year, the second-worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen dropped 4.9 percent, while the euro rose 2.7 percent and the dollar gained 0.4 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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