The pound dropped the most in three weeks against the euro after an industry report showed growth in U.K. services unexpectedly slowed in December, damping demand for Britain’s currency.
Sterling fell from the near the strongest in a month versus the shared currency as Chancellor of the Exchequer George Osborne said 25 billion pounds ($41 billion) of spending cuts will be needed after the next election. U.K. government bonds rose, pushing 10-year yields down the most since October. Bank of England officials meeting this week may lower the jobless rate they use as a benchmark for considering interest-rate increases, the Sunday Times newspaper reported yesterday.
“The market may be somewhat more vulnerable to the data,” said Steve Barrow, head of Group-of-10 research at Standard Bank Plc in London. “Most U.K. economic data and political noise has been pretty positive for quite a while and that’s why sterling’s been pretty strong. I think the pound is a buy around $1.63.”
The pound weakened 0.5 percent to 83.13 pence per euro at 4:29 p.m. London time, the biggest decline since Dec. 11. It appreciated to 82.71 pence on Jan. 2, the strongest since Dec. 3. The U.K. currency was little changed at $1.6414.
While the economy is “on the rise,” additional spending cuts will be required after the 2015 election with half of the amount coming from welfare, Osborne said in a speech in Birmingham, central England.
“Welfare cannot be protected from further substantial cuts,” he said. The “government is going to have to be permanently smaller and so too is our welfare system.”
A gauge of U.K. services output based on a survey of purchasing managers dropped to 58.8 last month from 60 in November, Markit Economics and the Chartered Institute of Purchasing and Supply said. Economists surveyed by Bloomberg News predicted an increase to 60.3.
The pound has gained 7.2 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid speculation the central bank will have to increase interest rates sooner than it currently predicts. The euro appreciated 3 percent, while the dollar fell 3.8 percent.
The yield on the benchmark 10-year gilt dropped six basis points, or 0.06 percentage point, to 2.97 percent, the biggest decline since Oct. 30. The 2.25 percent bond maturing in September 2023 rose 0.445, or 4.45 pounds per 1,000-pound face amount, to 93.995.
U.K. bonds lost 2.4 percent in the 12 months through Jan. 3, according to Bloomberg World Bond Indexes. German securities fell 1.2 percent and Treasuries declined 2.6 percent.
Bank of England Governor Mark Carney may lower the unemployment rate used as a benchmark for considering raising interest rates to 6.5 percent from 7 percent, the Sunday Times reported, citing economists.
Citigroup Inc. said it was skeptical the Monetary Policy Committee will adjust its interest-rate guidance thresholds as soon as this week.
“The MPC may want to delay any decision to adjust its forward-guidance parameters until the February Inflation Report,” Valentin Marinov, head of European Group-of-10 currency strategy in London, wrote in a note to clients. “Recent history seems to suggest that the IR release and press conference were the MPC’s preferred venue to introduce changes in its policy framework.”
Policy makers will keep their key interest rate at 0.5 percent and asset-purchase stimulus target at 375 billion pounds at their meeting ending on Thursday, according to Bloomberg News surveys of economists.
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