Pound Snaps 3-Day Euro Advance as Moody’s Puts Banks on Review

Pound Depreciates Against Euro
Sterling weakened against all but three of its 16 major peers, losing most against New Zealand’s dollar. Net borrowing was 10 billion pounds ($16 billion), compared with 7.2 billion pounds a year earlier, data showed today. Photographer: Simon Dawson/Bloomberg

The pound snapped a three-day gain against the euro after Moody’s Investors Service said it may lower the credit ratings of 14 British lenders and a report showed the U.K. budget deficit widened in April.

Sterling strengthened against most of its 16 major peers. Net borrowing was 10 billion pounds ($16.2 billion), compared with 7.2 billion pounds a year earlier, data showed today. The median of 12 forecasts in a Bloomberg News survey was for a shortfall of 6.5 billion pounds. Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc are among the institutions put on review for a downgrade, Moody’s said today.

“The Moody’s announcement is a fresh source of vulnerability for the pound,” said Michael Derks, chief strategist at FXPro Financial Services Ltd. in London. “That the deficit is slightly worse than expected is yet another reminder that there’s a very long way to go in order to rectify the dreadful state of the U.K.’s public finances.”

The pound depreciated as much as 0.4 percent to 87.52 pence per euro, before trading less that 0.1 percent weaker at 87.16 pence as of 4:54 p.m. in London. Sterling climbed 0.4 percent to $1.6190, after depreciating as much as 0.4 percent to $1.6058.

The U.K. government plans to eliminate the bulk of the nation’s deficit by April 2015 as it implements the toughest budget squeeze since World War II.

Policy Change

The shortfall, which reached a record 11 percent of gross domestic product in the aftermath of the recession, is forecast to narrow to 122 billion pounds in the fiscal year that began in April, or 7.9 percent of GDP, according to the Treasury’s fiscal watchdog.

Moody’s said guidance from the U.K. authorities “that banks that fail in the future should not expect capital injections from the public purse,” had prompted it to reassess its ratings.

The Moody’s announcement is “a concern and the market will be sensitive to that,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Given the stresses on the economy, it’s just another difficulty for the U.K. to tackle and sterling will remain under pressure.”

Bank of England policy makers voted 6-3 this month to hold interest rates at a record low of 0.5 percent as some members said an increase could hurt consumer confidence, minutes of the meeting showed last week.

Interest-Rate Expectations

Money markets price in a 25 basis-point increase in the key rate in February, according to sterling overnight interbank average forwards, Tullett Prebon Plc data show. As recently as February investors bet the rate would be lifted this month.

German business confidence remained unchanged in May as booming exports and rising company spending boosted economic growth. The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, held at 114.2 from April. That beat the 113.7 median estimate of 24 economists surveyed by Bloomberg News.

U.K. government bonds fell, pushing the yield on the 10-year gilt up four basis points to 3.34 percent. Two-year note yields were one basis point higher at 0.94 percent.

Gilts have handed investors a gain of 2.1 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. That compares with a loss of 0.2 percent for German bonds and a 2.2 percent return for U.S. Treasuries.

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