Pound Erases Drop After Service Sector Expands; Gilts Decline

The pound erased a decline against the dollar and gilts fell after a report showed U.K. services grew more than analysts estimated in May, damping speculation that the Bank of England will add stimulus to boost the economy.

Sterling advanced for a fourth day against the yen before the central bank announces its latest policy decision. Of 42 economists surveyed by Bloomberg, 37 forecast that the Monetary Policy Committee will keep its bond-purchase target on hold at 325 billion pounds ($503 billion). Citigroup Inc., Deutsche Bank AG, and Morgan Stanley are among banks that predict an expansion of the so-called quantitative-easing program.

“The case for not changing the amount of stimulus has been reinforced by the resilience in the service sector,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “For now it would make sense for the BOE to keep their powder dry and wait to see how events develop over the next month or two. If we see no change, we might see a little bit of a leap in sterling because some people are expecting more” asset purchases.

The pound was little changed at $1.5509 as of 11:07 a.m. London time, after falling as much as 0.4 percent. It reached $1.5269 on June 1, the lowest level since Jan. 13. Sterling strengthened 0.5 percent to 123.27 yen. Britain’s currency was little changed at 81.14 pence per euro, after declining 0.3 percent yesterday.

Services Expansion

A gauge based on a survey of purchasing managers remained at 53.3 from April, Markit Economics and the Chartered Institute of Purchasing and Supply said in a report today in London. The median estimate of 27 economists in a Bloomberg News survey was for a decline to 52.4. A measure above 50 indicates expansion.

Markit’s manufacturing gauge on June 1 fell more than economists forecast to 45.9, the lowest since May 2009. A construction index released yesterday slipped to 54.4 from 55.8.

The service sector data “reduces the pressure on the Bank of England to act,” Christian Schulz, an economist at Berenberg Bank in London, wrote in a note.

Policy makers will leave the benchmark interest rate at a record-low 0.5 percent, where it has been since March 2009, a separate survey shows.

The yield on 10-year gilts rose two basis points, or 0.02 percentage point, to 1.68 percent. The 4 percent bond due March 2022 fell 0.19, or 1.90 pounds per 1,000-pound face amount, to 120.76. The yield declined to a record 1.439 percent on June 1.

“The addition of stimulus today is a very close call because the U.K. economy is going through a very weak period,” said Gavin Friend, a markets strategist at National Australia Bank Ltd. (NAB) in London. “We don’t think they will add stimulus, but if they do, the pound would weaken, particularly against the euro.”

Benchmark Rate

Sterling has declined 1.3 percent in the past month, the second-biggest drop after Sweden’s krona among 10 developed- market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen rose 4.2 percent, the biggest gain, and the dollar added 3.6 percent. Sterling is still up 1.6 percent for the year to date.

“The pound remains under downward pressure,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a client note today. “The sharp turnaround in the pound’s performance over the past month has coincided with renewed expectations of further monetary easing from the BOE.”

While the U.K. economy has weakened, the pound has advanced 2.9 percent against the euro in the past three months as investors seek a haven from the crisis in the 17-nation currency bloc. It reached 79.51 pence on May 16, the strongest level since November 2008.

European Central Bank President Mario Draghi said yesterday that officials stand ready to act as the growth outlook worsens in the euro area, Britain’s biggest trading partner. While the ECB left its benchmark rate at 1 percent, Draghi said “a few” governing council members sought a cut.

Gilts have returned 2.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds rose 3.8 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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

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