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U.K. Pound Depreciates as Economic Outlook Reduces Wagers on Higher Rates

The pound weakened against the dollar for a third day after an industry group lowered the U.K.’s growth forecasts and Standard & Poor’s cut Greece’s sovereign debt rating, curbing investor demand for higher-yielding assets.

Sterling depreciated versus all but two of its 16 major peers, losing most against the Norwegian krone. Gross domestic product will rise 1.7 percent in 2011 compared with a February estimate of 1.8 percent, the Confederation of British Industry said in quarterly forecasts today.

“The Greek downgrade has added to the negative bent in the market and people are selling risky currencies as a result,” said Shant Movsesian, a strategist in London at 4Cast Ltd., a research company that counts central banks among its subscribers. “Cable’s come off a bit on the back of that,” Movsesian said, referring to the pound-dollar exchange rate.

The pound weakened 0.3 percent to $1.6319 and depreciated 0.2 percent to 131.73 yen as of 4:38 p.m. in London. Sterling slid as much as 0.8 percent to 88.18 pence per euro before trading little changed at 87.45.

The pound erased losses against the euro after S&P lowered Greece’s debt rating by two steps to B from BB-, dimming the appeal of the shared currency.

S&P’s lowering of Greece’s debt rating was the fourth by the company since April last year, leaving the Mediterranean nation within one reduction of having Europe’s worst ranking of creditworthiness. The euro fell below $1.43 for the first time in more than two weeks on concern the 17-member region’s debt crisis may worsen.

House Prices

News of the downgrade followed a report by London-based Halifax that showed U.K. house prices contracted 1.4 percent in April from the previous month, compared with 0.1 percent growth estimated in a Bloomberg survey. Economic growth next year will be 2.2 percent instead of 2.3 percent, the CBI said.

“The data has been weak and the problem is that we haven’t yet seen the full impact of the fiscal cuts on the economy,” said Sarah Hewin, a senior economist at Standard Chartered Bank in London. “That means the data is likely to get worse, which will allow the Bank of England to keep rates steady for longer. That will certainly keep the pound under pressure.”

The Bank of England kept its benchmark interest rate unchanged at a record low 0.5 percent on May 5 to boost the economy, which grew 0.5 percent in the first quarter after a similar-magnitude contraction in the final three months of last year. Slowing economic growth comes as Britain implements the deepest government spending cuts since World War II, threatening to drag output lower.

Inflation Target

The central bank’s monetary policy stance is also being complicated by inflation, which is accelerating at twice its 2 percent target. Inflation unexpectedly eased to 4 percent in March, following five months of acceleration to a more than two- year high of 4.4 percent in February.

“Growth will remain weak and we see no rate hike in 2011,” said Hewin. “Rate hikes have been pushed back. We see the first rate hike in the first quarter of 2012.”

Money markets are factoring in a 25 basis-point increase in the central bank’s main rate by year-end, according to sterling overnight index average forwards, Tullett Prebon Plc data show.

U.K. government bonds rose, with the yield on the 10-year gilt declining two basis points to 3.36 percent. The two-year note yielded 0.99 percent, two basis points lower than the previous close.

Short-sterling futures rose, lowering the implied yield on the contract expiring in March 2012 by one basis point to 1.25 percent, as traders pared bets on expectations for rate increases next year.

To contact the reporter on this story: Garth Theunissen in London at gtheunissen@bloomberg.net

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

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