Pound Rises Versus Euro, Trims Weekly Drop, as Deficit Shrinks

The pound rose for the first time in four days against the euro after a report showed Britain’s budget deficit was the smallest for a September since 2008.

Sterling slid for a fourth week against the dollar, the longest streak of losses in four months, after Bank of England policy maker David Miles said the U.K. economy was not recovering as well as he had hoped. The pound trimmed its weekly drop versus the euro after a technical indicator used by traders to predict price changes signaled its recent decline was excessive. Gilts are also set for a weekly fall, with 10-year yields touching 1.96 percent yesterday, the highest in a month.

“The deficit data was a pleasant surprise,” said Philip Rush, an economist at Nomura International Plc in London. “It shows less fiscal slippage.”

The pound strengthened 0.1 percent to 81.34 pence per euro at 4:30 p.m. London time, trimming its weekly slide to 0.9 percent. It rose 0.2 percent to $1.6010, having dropped 0.4 percent this week.

The U.K. shortfall excluding government support for banks narrowed to 12.8 billion pounds from 13.5 billion pounds a year earlier, the Office for National Statistics said in London today. The median estimate of 21 economists in a Bloomberg News survey was a deficit of 13.5 billion pounds.

Britain’s public finances have been hit by a recession that has depressed tax revenue and pushed up welfare spending. Today’s figures showed borrowing between April and August was revised down by 6.7 billion pounds, meaning U.K. Chancellor of the Exchequer George Osborne may overshoot his full-year forecast by less than previously thought.

Retail Sales

The pound has weakened 1.3 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 3.3 percent and the dollar dropped 3.3 percent.

The 14-day relative strength index for the pound against the euro, which tracks momentum by comparing closing prices with daily trading ranges, was 33, after reaching 29 yesterday, the lowest since Sept. 14. A drop below 30 indicates an asset may be “oversold” and has fallen too quickly.

Data this week showed U.K. retail sales rose more than analysts forecast in September and jobless claims slid, adding to signs that the economy is recovering from a recession. The government will release gross domestic product data for the third quarter on Oct. 25.

British Growth

“Slightly better retail sales data yesterday shouldn’t be overstated in their significance,” Lloyds Banking Group Plc Strategists Adrian Schmidt and Jennifer Hau wrote in a note to investors. “We still look for the Bank of England to extend stimulus in November. We are biased toward a lower pound.”

British GDP will shrink 0.3 percent this year, according to a Bloomberg survey, the first contraction since 2009.

“The state of the economy is not as good as I had hoped a year or so back, I must admit,” Miles told the Guardian in an interview published late yesterday. “The last 18 months have seen no significant growth.”

Minutes of the London-based central bank’s October meeting released on Oct. 17 showed policy makers were split on the need for more stimulus once their current program ends next month.

Policy makers voted 9-0 to keep the bond-purchase target at 375 billion pounds at that meeting, the minutes showed. They were also unanimous in holding the benchmark interest rate at a record low of 0.5 percent.

Ten-year gilt yields fell two basis points, or 0.02 percentage point, to 1.89 percent. The 1.75 percent security maturing September 2022 rose 0.19, or 1.90 pounds per 1,000- pound face amount, to 98.73.

Gilts returned 1.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 2.2 percent and U.S. Treasuries rose 1.3 percent.

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

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

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