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British Pound Depreciates Against Euro as U.K. Manufacturing Growth Slows
The pound weakened for a second day against the euro as a report showed U.K. manufacturing growth fell to a nine-month low in August, stoking speculation that the economic recovery is stalling.
The U.K. currency erased an earlier advance against the 16- nation currency after the manufacturing purchasing managers’ index declined to 54.3 last month from a revised 56.9 in July, according to a survey of companies from the Chartered Institute of Purchasing and Supply and Markit Economics. That’s below the median forecast of 57 by 23 economists in a Bloomberg survey. Government bonds weakened as the U.K. sold 1 billion pounds ($1.5 billion) of gilts maturing in 2038.
“The PMI data was disappointing for sterling, and raises concerns over the strength of the recovery,” said Adam Cole, head of currency strategy at RBC Capital Markets in London. “It breaks the run of decent data, and it seems the strength of the consumer sector is not mirrored in industry.”
The pound depreciated 0.4 percent to 82.93 pence per euro as of 4:20 p.m. in London. It earlier reached 83.28 pence per euro, the weakest level since Aug. 10.
Sterling rose against the dollar after a report by ADP Employer Services showed U.S. companies cut 10,000 jobs last month. The pound strengthened 0.6 percent to $1.5443. Sterling fell to $1.5327 yesterday, the lowest level since July 23.
Investors should sell the pound against Switzerland’s currency in a bet that sterling will weaken to 1.5000 francs as the government cuts spending, UBS AG said. That would be the lowest level on record.
Austerity Measures
The U.K. government will announce cutbacks on Oct. 20 that will slash most departments’ budgets by a quarter to reduce a deficit that hit a postwar high of 11 percent of the economy in the year through March.
“Sterling is likely to weaken further once the U.K. government’s fiscal austerity program starts,” wrote Mansoor Mohi-uddin, chief currency strategist in Singapore at UBS, the world’s second-largest foreign-exchange trader, in an e-mail.
The pound strengthened 0.8 percent to 1.5703 francs. It reached 1.5515 earlier, the lowest level since Jan. 2, 2009.
Gilts fell as the Debt Management Office sold 1 billion of 4.75 percent gilts due 2038 in a so-called mini-tender. Investors bid for 1.56 times the amount of securities on offer. The debt office plans to sell 3.75 billion pounds of 5 percent gilts maturing in 2014 tomorrow.
Gilt Yields
The 10-year gilt yield climbed nine basis points to 2.93 percent. The two-year yield rose four basis points to 0.69 percent.
Gilts surged last month, pushing yields to record lows. U.K. government bonds returned 4.7 percent in August, the most since December 2008, according to Bank of America Merrill Lynch indexes.
Gilt futures may rise as high as 126 should the price of the December contract surpass a key level, UBS said, citing technical indicators.
The contract faces so-called resistance at 125.58, the high from Aug. 25, according to Richard Adcock, head of fixed-income technical strategy at UBS in London.
“Gilts are bullish while they trade above the 124.29 low and while this remains intact the expectation is for limited corrections and further price strength,” Adcock wrote in an e- mailed report today. “The break above last Wednesday’s 125.58 high will be the next bullish trigger, opening the door to the longer-term extension level at 125.81, then 126.00, which will be the target for any longs established over the coming days.”
Gilt futures expiring in December fell 0.8 percent to 124.29.
To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net
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