The pound dropped by the most in seven weeks against the dollar after a government report showed U.K. retail sales unexpectedly declined in August.
Britain’s currency weakened versus 11 of its 16 major counterparts as the data damped optimism the economy is gaining momentum. U.K. government bonds rallied, with 10-year yields falling the most in three weeks, after Federal Reserve policy makers yesterday unexpectedly refrained from slowing debt purchases. The Debt Management Office sold 4.75 billion pounds ($7.63 billion) of five-year gilts.
“Retail sales has proved a bit of a reality check for sterling,” said Simon Smith, chief economist at FxPro Group Ltd. in London. “There had a decent run of better-than-expected data in the U.K. which had been pushing the pound higher and the Fed just gave it last push above $1.60. It had the wind taken out of its sails a bit.”
The pound weakened 0.6 percent to $1.6049 at 4:40 p.m. London time, the biggest decline since July 30. It jumped as much as 1.6 percent to $1.6163 yesterday. Sterling depreciated 0.7 percent to 84.29 pence per euro.
Retail sales including fuel fell 0.9 percent from July, the Office for National Statistics said. The median forecast of economists in a Bloomberg News survey was for a gain of 0.4 percent. Reports earlier this month showed manufacturing surged, the jobless rate dropped and house prices increased.
The pound has risen 5.6 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.2 percent, while the dollar fell 1.3 percent.
The 10-year gilt yield dropped 10 basis points, or 0.1 percentage point, to 2.91 percent, the biggest decline since Aug. 27. The 2.25 percent bond due September 2023 rose 0.81, or 8.10 pounds per 1,000-pound face amount, to 94.365.
U.S. policy makers said they want more evidence of a recovery before paring their $85 billion-a-month quantitative-easing program. Chairman Ben. S. Bernanke said the central bank must determine its policies based on “what’s needed for the economy,” even if it surprises markets.
U.K. 10-year yields climbed to 3.05 percent on Sept. 11, the highest level since July 2011. They have risen more than one percentage point this year.
The Debt Management Office auctioned five-year gilts at an average yield of 1.652 percent, compared with a rate of 1.405 percent at a previous sale on Aug. 6.
U.K. government bonds lost 4.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds fell 2.7 percent and Treasuries dropped 2.9 percent.
Bank of England minutes published yesterday showed the nine-member Monetary Policy Committee voted unanimously to keep its bond-purchase stimulus program at 375 billion pounds and the benchmark interest rate at a record-low 0.5 percent.
“The general consensus is that clearly this is a more dovish Fed than they thought and clearly it throws some doubt around the timing of the removal of their QE policies,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. “The Bank of England had a more hawkish bent in its minutes yesterday so we’ve seen significant improvement in the pound,” he said, referring to the currency’s gain yesterday.
Sterling will probably see some resistance around current levels though may still strengthen to around $1.63, Gibbs said. Resistance refers to an area where sell orders may be clustered.
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