Pound Falls to Two-Week Low Versus Euro as Retail Sales Decline

The pound fell to a two-week low against the euro after a government report showed U.K. retail sales declined in October more than economists forecast.

Sterling reached the weakest in more than two months versus the dollar after the Bank of England signaled yesterday it hadn’t ruled out extending a program of asset purchases to stimulate the economy. Gilts were little changed as the Debt Management Office sold 2 billion pounds of 40-year bonds. Moody’s Investors Service said it would assess the U.K.’s Aaa rating at the beginning of next year as the economy slows.

“The weak retail-sales data this morning suggested the economic rebound in the third quarter was in fact due to a one- off factor, namely the Olympics,” said Eimear Daly, a currency market analyst at Monex Europe Ltd. in London. “We are likely to see a sharp drop in the growth figure in the fourth quarter. This will probably weigh on the pound in the near term.”

The pound depreciated 0.2 percent to 80.59 pence per euro at 4:41 p.m. London time after sliding to 80.65, the weakest since Oct. 31. The U.K. currency rose 0.2 percent to $1.5864. It earlier declined to $1.5829, the lowest since Sept. 5.

Sterling has dropped 2.9 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 1.5 percent and the dollar dropped 2 percent.

Retail sales including fuel slipped 0.8 percent last month after rising 0.5 percent in September, the Office for National Statistics said in London. The median forecast of 23 economists surveyed by Bloomberg News was for a decline of 0.1 percent.

Inflation Concern

Bank of England Governor Mervyn King said yesterday inflation is set to remain above the central bank’s 2 percent target into next year, though policy makers haven’t ruled out a fourth round of so-called quantitative easing to encourage economic growth.

“What the Bank of England said suggests the U.K. needs a weaker sterling, given that growth remains subdued,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. The direction of the pound will also depend on external factors such as the strength of the U.S. economy and the European debt crisis, he said.

The Debt Management Office sold 2 billion pounds of 3.75 percent bonds due in July 2052 at an average yield of 3.22 percent, compared with 3.55 percent at the previous auction of the securities on July 19. The sale attracted bids of 1.72 times the amount on offer, versus 1.67 times in July.

Rating Assessment

The benchmark 10-year gilt yielded 1.74 percent. The price of the 1.75 percent bond due in September 2022 was at 100.11.

The 10-year yield climbed as much as eight basis points, or 0.08 percentage point yesterday, after the Bank of England cut its growth outlook while raising its inflation projection.

Moody’s said yesterday it will reassess the U.K. credit rating next year as the economy cools and the government and private sector seek to reduce their debt levels.

The government’s Autumn Statement, scheduled to be released in December, may reveal “the likely speed of fiscal consolidation, the growth outlook and, most importantly, the assurances offered that the debt trajectory will stabilize and start to decline,” Moody’s said.

Gilts returned 3.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4 percent and U.S. Treasuries rose 2.8 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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