Pound Weakens Against Euro as Inflation Slows

The pound weakened against the euro and gilts rose as a report showed inflation slowed to the least since November 2009, strengthening the case for the Bank of England to resume asset purchases to revive the economy.

Sterling weakened against the euro for the first time in three days, paring gains that pushed it yesterday to the strongest level in almost a week. The Bank of England is due to publish minutes of its June meeting tomorrow, in which policy makers may indicate their stance on quantitative easing. The central bank said it will sell 5 billion pounds ($7.87 billion) of debt tomorrow in the first Extended Collateral Term Repo Facility designed to reduce financial-stability risks.

“There has been a fairly consistent tendency for sterling to outperform on positive inflation surprises and underperform on negative surprises, and that’s again what we are seeing today,” said Adam Cole, global head of foreign-exchange at RBC Capital Markets in London. “We may see some softness as the markets builds in more expectation of QE.”

The pound fell 0.5 percent to 80.68 pence per euro at 4:50 p.m. London time. It advanced to 80.23 pence yesterday, the strongest level since June 12. It gained 0.4 percent to $1.5729.

Consumer prices rose 2.8 percent from a year earlier, compared with a 3 percent increase in April, the Office for National Statistics said today in London. That’s the weakest since November 2009. Economists had forecast a gain of 3 percent, the median estimate in a Bloomberg News survey showed. From April, prices fell 0.1 percent, the first drop in that period since records began in 1996.

Oil, Food Costs

Declines by the pound may be limited amid speculation central banks, including the European Central Bank and the Federal Reserve, will also add to stimulus measures, according to Michael Sneyd, a currency strategist at BNP Paribas in SA in London.

“We are not too concerned about the outlook for QE because we also expect easing from the ECB and the Fed,” said Sneyd, who expects the U.K. currency to trade at $1.75 by year-end. The measures announced last week are “positive for the U.K. economy and for sterling,” he added.

BNP Paribas’ forecasts for the pound are the most bullish among 52 analyst estimates compiled by Bloomberg News. The median forecast is for the currency to end 2012 at $1.56.

G-20 Summit

Sterling has appreciated 1.5 percent this year, the second- best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, after the New Zealand dollar, as investors sought U.K. assets as a haven from Europe’s debt crisis. The euro dropped 2.1 percent.

G-20 leaders began a two-day meeting in Mexico yesterday as Spain’s borrowing costs surged to a euro-era record and elections in Greece failed to damp the threat of debt-crisis contagion.

Two-year note yields were little changed at 0.24 percent after falling to 0.173 percent yesterday, the lowest on record. Ten-year gilt yields were five basis points higher at 1.72 percent.

Gilts have returned 2.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds advanced 3.3 percent and Treasuries gained 2.1 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Anchalee Worrachate at aworrachate@bloomberg.net

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

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