Pound Weakens Against Euro After Manufacturing Growth Stalls

The pound weakened against the euro after a report showed U.K. manufacturing growth unexpectedly stalled in February, fueling speculation that the Bank of England will keep interest rates lower for longer.

Two-year gilts rose and sterling slid against 13 of its 16 most traded peers. Factory output was unchanged from January, when it rose 0.9 percent, the Office for National Statistics said today in London. The median forecast of 26 economists in a Bloomberg News survey was a 0.6 percent increase. Futures traders pared bets borrowing costs will rise. The Bank of England will keep its key rate at a record low tomorrow, a survey of economists showed.

The report “took some of the wind out of sterling’s sails,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “We don’t think the BOE will be raising rates until November. Sterling has been vulnerable against the euro for months.”

The pound weakened 0.6 percent to 87.84 pence per euro as of 4:57 p.m. in London. It was 0.1 percent stronger at $1.6318 after climbing to $1.6364, the strongest level since March 23.

The implied yield on the December short-sterling futures contract dropped six basis points to 1.49 percent as traders reduced wagers rates will rise. It reached 1.59 percent yesterday, the most since March 10.

Home, Shop Prices

The U.K. currency fluctuated against the dollar as a report showed home prices rebounded in March. Prices increased 0.1 percent from February, when they dropped 0.9 percent, Lloyds Banking Group Plc’s Halifax unit said today. A report yesterday showed service industries grew in March at the fastest pace in more than a year, adding to optimism that the economic contraction in the fourth quarter will be reversed.

“We would still expect the pound to appreciate because in the end, the Bank of England will raise interest rates,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “We’ll need some more hawkish comments and that would be positive for the pound.”

Britain’s currency may strengthen to 83 pence per euro and trade at $1.60 by the end of the year, Karpowitz said. The median of 36 analysts’ and strategists’ predictions compiled by Bloomberg News is for the pound to end the year at 84 pence.

The pound has fluctuated between $1.60 and $1.64 for two months as investors assessed the likelihood and consequences of tighter monetary policy.

Rate Meeting

U.K. shop prices rose 2.4 percent last month from a year earlier, down from 2.7 percent, which was the fastest since November 2008, the British Retail Consortium in London said in a report today. The U.K.’s inflation rate quickened to 4.4 percent in February, more than twice the central bank’s 2 percent target, a government report showed on March 22.

The Bank of England will probably keep the benchmark rate at 0.5 percent tomorrow, according to all 57 economists surveyed by Bloomberg. The rate hasn’t changed since March 2009. They will also keep their bond-purchase plan at 200 billion pounds, according to a separate survey. The decision will be announced at noon in London.

The yield on the two-year gilt, considered more sensitive to interest rate expectations, declined four basis points to 1.40 percent, after being as high as 1.46 percent, the most since Feb. 25. The 10-year government bond yield was little changed at 3.76 percent.

The U.K. Debt Management Office sold 1 billion pounds of inflation-protected bonds maturing in November 2037 at a real yield of 0.711 percent. Investors bid for 2.03 times the amount of debt on sale, compared with a so-called bid-to-cover of 1.85 times at the previous auction of the securities in November 2009.

‘Core’ Market

Gilts have become a “core” government bond market, offering investors a “risk-free asset,” according to the nation’s debt chief Robert Stheeman.

“If the sovereign debt crisis becomes very much more in focus for the market I think what you’re going to see is really a focus on the core government bond markets and the U.K. now has indeed become very much a core government bond market,” Stheeman said today in an interview on Bloomberg Television’s “Last Word” with Maryam Nemazee. “It’s effectively a diversification trade for many international investors. Sterling government bonds, U.K. gilts, do represent the risk-free asset.”

Gilts handed investors a loss of 1.2 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. German securities lost 2.5 percent, while U.S. Treasuries dropped 0.2 percent, the indexes show.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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