The pound fell to a one-month low against the euro after a government report showed U.K. retail sales unexpectedly declined last month, supporting the central bank’s case to boost monetary stimulus.
The U.K. currency slid to the lowest in more than two months versus the dollar after minutes of the Bank of England’s May 8-9 meeting also released today showed Governor Mervyn King was defeated for a fourth month in his bid to expand bond buying. The pound extended losses versus the dollar after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank may cut the pace of its asset purchases in the next few months. U.K. government bonds were little changed.
“The retail sales report today will add downward pressure to the pound,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “I have a more optimistic view on the U.K. outlook than the market consensus but I can understand why the data today would boost speculation for further quantitative easing, which is negative for sterling.”
The pound dropped 0.5 percent to 85.56 pence per euro at 5:13 p.m. London time after depreciating to 85.90 pence, the weakest since April 22. The U.K. currency fell 0.8 percent to $1.5020, the lowest since March 14.
Sterling has slumped 3.2 percent this year, the second-worst performer after the yen among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 5.6 percent and the euro rose 2.7 percent.
U.K. retail sales including fuel dropped 1.3 percent from March, when they declined 0.6 percent, the Office for National Statistics said. The median forecast of economists in a Bloomberg News survey was for an increase of 0.1 percent. A separate report showed the underlying budget deficit widened.
“Much weaker headline April retail sales were used as another excuse to sell the pound,” Elsa Lignos, a senior currency strategist at Royal Bank of Canada in London, wrote in a note to clients. “It seems that we are entering another period of negative market bias on the pound much like January and February, and much like the last one, we think it will ultimately prove overdone.”
Six members of the Bank of England’s Monetary Policy Committee voted to keep quantitative easing at 375 billion pounds this month, the minutes showed. King, David Miles and Paul Fisher maintained their campaign to increase quantitative easing by 25 billion pounds.
The pound extended losses versus the dollar after Bernanke said in testimony to the U.S. Congress in Washington that the Fed may cut the pace of its asset purchases in the next few meetings. Meanwhile, monetary policy is providing “significant benefits,” he said.
The 10-year gilt yielded 1.90 percent after dropping as much as seven basis points, or 0.07 percentage point. The 1.75 percent bond due in September 2022 was at 98.71.
Gilts gained earlier as the International Monetary Fund said Britain should stay focused on policies to foster economic growth and keep monetary policy accommodative.
The IMF praised the government for showing flexibility in its fiscal program, though it said planned tightening will act as a drag on growth. It also said officials should consider providing guidance that interest rates will stay low.
The 10-year break-even rate, a gauge of market inflation expectations derived from the difference in yield between conventional and index-linked bonds, shrank five basis points to 3.04 percentage points after reaching 3.02 percentage points, the narrowest since Jan. 15.
Gilts handed investors a loss of 1.9 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds and U.S. Treasuries both dropped 1 percent.
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