Pound Declines After GDP Report; U.K. Yields Reach 4-Week Low

The pound fell the most in a week against the dollar after a government report showed annual economic growth was less than earlier estimated, damping optimism the U.K. recovery is gathering momentum.

Sterling weakened versus all except one of its 16 major counterparts after separate data showed Britain’s current-account deficit widened in the first quarter to the most since at least 1955. The pound has risen versus all its peers in the past six months amid speculation an improving economy will spur the Bank of England to increase interest rates sooner than it intends. U.K. government bonds were little changed after 10-year yields fell to the lowest level in four weeks.

“Growth numbers came in a bit softer year-on-year and what really sticks out is the current-account data,” said Ned Rumpeltin, head of Group-of-10 currency strategy at Standard Chartered Bank in London. “The market went into these numbers long and a little bit complacent so we’re seeing reaction in positioning.” A long position is a bet an asset will rise.

The pound dropped 0.4 percent to $1.6014 at 4:47 p.m. London time, the biggest decline since Sept. 19. The U.K. currency fell 0.1 percent to 84.22 pence per euro after appreciating to 83.53 pence on Sept. 18, the strongest level since Jan. 17.

Sterling has advanced 6.3 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 5.4 percent, while the dollar was little changed.

GDP Report

Gross domestic product increased 1.3 percent in the second quarter from a year earlier, compared with an initial reading of 1.5 percent, the Office for National Statistics said in London. The current-account deficit shrank to 13 billion pounds in the second quarter while the figure for the previous three months was revised up to 21.8 billion pounds from an earlier estimate of 14.5 billion pounds, the statistics office said.

Business investment dropped 2.7 percent in the second quarter and declined 8.5 percent from a year earlier, the office also reported.

The Bank of England led by Governor Mark Carney has pledged to keep interest rates low until the unemployment rate falls to 7 percent. It was 7.7 percent in the three months through July.

“The pound fell back from its highs of the day on the back of the GDP news and the disappointing business investment,” said Kathleen Brooks, a research director in London at Forex.com, a unit of online currency-trading company Gain Capital Holdings Inc. (GCAP), wrote in a e-mailed note. “The market will likely be sensitive to U.K. economic data misses going forward as they may support the BOE’s dogged support for forward guidance and promised to keep rates low.”

The benchmark 10-year gilt yield was at 2.75 percent after dropping to 2.72 percent, the lowest level since Aug. 27. The price of the 2.25 percent bond due in September 2023 was 95.7.

Gilts lost 3.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities dropped 1.7 percent and Treasuries fell 2.4 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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

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