Bloomberg News

Pound Drops Below $1.50 as Manufacturing Shrinks; Gilts Advance

March 01, 2013

U.K. Gilts Rise as Pound Drops After Manufacturing Contraction

Skyscrapers are seen at sunrise in the Canary Wharf business district in London. Photographer: Simon Dawson/Bloomberg

The pound weakened through $1.50 for the first time since since July 2010 after an industry report showed U.K. manufacturing unexpectedly shrank in February.

Sterling dropped for the third time in four days versus the euro as the Bank of England said mortgage approvals declined in January, signaling the housing market is struggling to recover. The pound has dropped the most of any major currency this year as speculation the central bank will need to add more monetary support to the faltering economy damped demand. U.K. government bonds rose, with 10-year yields set for their biggest weekly drop since November 2011.

“The data was supposed to be good and it came out negative so that has taken the rug out from under sterling’s feet,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “There is an array of negative fundamentals for the U.K., so it’s very difficult to see silver linings. I think sterling will be weak all year.”

The pound dropped 1 percent to $1.5018 at 4:40 p.m. London time after sliding to $1.4986, the lowest since July 13, 2010. The U.K. currency depreciated 0.4 percent to 86.43 pence per euro. It reached 88.15 pence on Feb. 25, the weakest level since Oct. 28, 2011.

The pound has depreciated 5.5 percent this year, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 3.2 percent and the euro rose 1.3 percent.

Manufacturing Shrinks

A gauge of U.K. manufacturing based on a survey of purchasing managers slid to 47.9 last month, according to Markit Economics and the Chartered Institute of Purchasing and Supply. Economists surveyed by Bloomberg forecast an increase to 51, above the level of 50 that divides growth from contraction.

“The data was very disappointing and way below expectations,” said Bernd Berg, a currency strategist at Credit Suisse Group AG in Zurich. “They show that the economy is contracting much more than expected, reinforcing the case for further quantitative easing by the Bank of England.”

The central bank will keep its asset-purchase target unchanged at 375 billion pounds when it announces its next decision on March 7, according to 28 of 39 economists surveyed by Bloomberg. Nine forecast an increase of 25 billion pounds, with the remaining two predicting expansion of 50 billion pounds and 75 billion pounds.

Mortgage approvals fell to 54,719 from 55,632 in December, the Bank of England said. Net mortgage lending rose by 147 million pounds, the least since August.

Business Boost

WPP Plc (WPP), the world’s largest advertising company, said the weaker pound was boosting its business.

“We’ll have a bit of a following wind from currency,” Chief Executive Officer Martin Sorrell said on Bloomberg Television’s “Countdown” in an interview with Mark Barton. “We’ve already seen the dollar go from about $1.60 to $1.50 as the pound weakened against the dollar the first few months of this year, so things I think are sort of moving our way a little bit as we go into 2013.”

WPP’s profit before interest and taxation rose 7.1 percent to 1.53 billion pounds, the company said today.

The 10-year gilt yield fell 10 basis points, or 0.1 percentage point, to 1.87 percent, the lowest since Dec. 31. The 1.75 percent bond due in September 2022 rose 0.865, or 8.65 pounds per 1,000-pound face amount, to 98.94. The yield has dropped 24 basis points this week, the most since the period ended Nov. 4, 2011.

The two-year yield declined five basis points to 0.19 percent, heading for an eighth week of declines, the longest since June 2011.

“Prospects for U.K. growth aren’t good,” said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London. “Certainly the growth outlook justifies the level of gilt yields.”

U.K. government bonds returned 0.9 percent in February, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 1.3 percent and Treasuries rose 0.7 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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