Pound Weakens Against Dollar on Deteriorating Economic Outlook

The pound fell the most in more than two months against the euro this week on concern measures aimed at stimulating growth may not be sufficient to pull the U.K. economy out of recession.

Two-year gilt yields dropped to a record on Aug. 2 after a report showed U.K. factory output in July shrank the most in three years. Sterling slid for the first time in a month against the dollar as Moody’s Investors Service cut its forecast for U.K. economic growth and said the government will struggle to meet its deficit targets, putting pressure on Chancellor George Osborne to loosen the government’s fiscal policy.

“Sterling is somewhat softer on the week and it may be that investors are starting to price in a discount for the U.K. economy,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “If stimulus measures aren’t working then you have to start pricing in disappointing data.”

The pound fell 1.2 percent to 79.19 pence per euro at 5:46 p.m. London time yesterday after touching 79.24 pence, the weakest since July 10. It lost 0.7 percent to $1.5643 after declining to $1.5491 two days ago, the lowest since July 26.

The pound fell in the week versus all 16 of its major currency peers tracked by Bloomberg.

The Bank of England left its bond-buying program on hold at 375 billion pounds and kept interest rates at a record low 0.5 percent on Aug. 2. The worsening economic outlook prompted banks including Morgan Stanley (MS) and Barclays Plc (BARC) to revise forecasts this week and predict more U.K. stimulus later this year.

BOE Report

The Bank of England’s latest inflation and growth projections will be revised down at its quarterly inflation report on Aug. 8, according to the National Institute of Economic and Social Research. The British economy will shrink 0.5 percent this year, it said.

“U.K. growth is not going to be the right side of zero and the Bank of England will reflect that in its growth projections next week,” said Alan Clarke, an economist at Scotiabank Europe Plc in London.

Sterling has dropped 1.8 percent in the past three months, paring its gain for the year to 0.4 percent, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market peers. The dollar rose 2 percent and the euro slid 4.6 percent.

Two-year U.K. gilt yields were little changed in the week at 0.111 percent. They fell to a record 0.033 percent as concern over the euro-area crisis boosted demand for perceived haven assets. Benchmark 10-year yields rose two basis points to 1.56 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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