The pound weakened for the first time in three days against the euro after reports showed the U.K. budget deficit widened and consumer confidence unexpectedly declined, damping optimism the recovery is gaining momentum.
Sterling fell from the strongest in two weeks versus the single currency even as separate data confirmed Britain’s economic growth accelerated in the third quarter. The pound has still appreciated at least 0.5 percent against all of its 16 major counterparts in the past three months. U.K. 10-year government bonds rose after yields earlier climbed to the highest level since September.
“We’re coming out of the recession with an already very wide deficit,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “Normally we would have expected the deficit to have closed up somewhat but that hasn’t been the case so it does risk the deficit widening out once again. That could be a longer-term drag for sterling.”
The pound dropped 0.2 percent to 83.62 pence per euro at 4:23 p.m. London time, trimming this week’s advance to 0.9 percent. The U.K. currency fell 0.1 percent to $1.6362, having gained 0.4 percent since Dec. 13.
The budget deficit excluding temporary support for banks expanded to 16.5 billion pounds in November compared with 15.6 billion pounds a year earlier, the Office for National Statistics said in London. GfK NOP Ltd. said its consumer-sentiment index dropped to minus 13 this month from minus 12 in November. Economists surveyed by Bloomberg News predicted an improvement to minus 11.
The pound has gained 4 percent in the past three months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid speculation a strengthening economy will spur the Bank of England to increase interest rates. The euro appreciated 2.8 percent and the dollar rose 1.5 percent.
The yield on the benchmark 10-year gilt dropped two basis points, or 0.02 percentage point, to 2.94 percent after increasing to 2.995 percent, the highest level since Sept. 18. The 2.25 percent bond due in September 2023 rose 1.45, or 1.45 pounds per 1,000-pound face amount, to 94.195. The rate has risen four basis points since Dec. 13.
Gilts declined this week as data showed the U.K. jobless rate dropped to a four-year low of 7.4 percent in the three months through October, damping demand for safer assets. They also fell as the Federal Reserve said it would scale back monthly purchases of Treasuries and mortgage-backed securities to $75 billion from $85 billion.
“It’s been a week where we’ve seen a break out of a narrow range to the upside in yield,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “The combination of the strong labor market data in the U.K. and also the tapering decision by the Fed has pushed yields up.”
U.K. gilts handed investors a loss of 4.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities dropped 1.9 percent and U.S. Treasuries declined 3 percent.
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