Pound Drops to 11-Month Low Versus Euro Before U.K. GDP

The pound fell to the weakest level in 11 months versus the euro before data tomorrow that economists said will show U.K. gross domestic product shrank last quarter.

Sterling declined against most of its 16 major peers after an industry report showed retail-sales growth slowed in January, adding to signs the economy is struggling to recover. The U.K. currency dropped to the lowest level in almost five months versus the dollar. Investors should sell the pound due to “weak economic fundamentals,” Citigroup Inc. said. Gilts fell, reversing an earlier advance.

“People are expecting a weak out-turn for U.K. GDP tomorrow,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London. “It looks like sterling is taking out stop-losses after its failure to bounce.” A stop loss is a preset instruction to exit a trade at a certain level in case a bet goes the wrong way.

The pound depreciated 0.8 percent to 84.76 pence per euro at 4:35 p.m. London time after sliding to 84.81 pence, the weakest since Feb. 28. Sterling fell 0.4 percent to $1.5780 after declining to $1.5757, the lowest since Aug. 28.

U.K. GDP contracted 0.1 percent from the third quarter, when it expanded 0.9 percent, according to the median estimate of 38 analysts in a Bloomberg survey before tomorrow’s report.

Sales Fall

The gauge of annual retail-sales growth fell to 17 this month from 19 in December, the Confederation of British Industry said. Stores predict it will slide to 13 in February, the London-based business lobby said.

“Fundamentals seem to continue to deteriorate while the safe-haven bid for the pound is apparently gone,” Citigroup strategists including Valentin Marinov in London, wrote today in a note to clients. “With the U.K. economy already teetering on the verge of a triple-dip recession and inflation stable, markets are likely to continue to sell the pound.”

The Citigroup Economic Surprise Index for the U.K. is negative, while that for the euro area is positive, the strategists said.

The pound has weakened 2.8 percent this year, the second- worst performer after the yen out of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 2 percent and the dollar gained 0.4 percent.

The 10-year gilt yield rose two basis points, or 0.02 percentage point, to 2.01 percent. The 1.75 percent bond maturing in September 2022 fell 0.17, or 1.70 pounds per 1,000- pound face amount, to 97.74. The yield earlier dropped as much as five basis points to 1.94 percent, the lowest since Jan. 2.

“We are looking for U.K. GDP to fall back below zero,” said Sam Hill, a gilts strategist at Royal Bank of Canada in London. “Any upward threat to yields will be capped by what is still a weak macro backdrop.”

Gilts returned 2.7 percent over the past year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds rose 4.2 percent and Treasuries gained 2.6 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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