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Pound Falls to 7-Week Low as Job Confidence Sinks; Gilts Rise

Sept. 5 (Bloomberg) -- The pound fell to a seven-week low against the dollar after U.K. reports showed confidence in the outlook for employment weakened and a services index declined, boosting the case for more economic stimulus measures.

Sterling extended two weeks of losses against the yen and slumped below its 200-day moving average against the greenback for the first time since July. Government bonds climbed, driving yields on two-year gilts to a record low. Goldman Sachs Group Inc. said it expects the Bank of England to resume so-called quantitative easing “in the coming months” and pushed back its forecast for higher interest rates until 2013.

“Over the past couple of weeks the topic of QE has got more momentum behind it,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “The fact that it appears to be on the table is likely to keep sterling undermined.”

The pound depreciated 0.7 percent to $1.6097 at 4:47 p.m. in London, after dropping to $1.6062, the lowest level since July 19. Sterling slipped below its 200-day moving average, currently at $1.6123, for the first time since July 19, according to data compiled by Bloomberg.

The pound weakened for a fifth day against the Swiss franc, sliding 1.2 percent to 1.2631 francs. It was little changed at 87.61 pence per euro. The U.K. currency declined 0.7 percent to 123.73 yen, after depreciating 0.8 percent last week.

Confidence Falls

An index of consumer sentiment toward hiring prospects slid 13 points to minus 66 for August, the lowest since February, Lloyds Bank Corporate Markets said today. A gauge of services activity based on a survey of purchasing managers fell to 51.1 from 55.4 in July, according to Markit Economics and the Chartered Institute of Purchasing and Supply.

November is the most likely month for the resumption of bond purchases by the central bank, and there is likely to be 100 billion pounds of quantitative easing over two quarters, Goldman Sachs economists Kevin Daly and Adrian Paul in London wrote in a note to clients dated Sept. 2. The bank may resume quantitative easing as soon as this week, Citigroup Inc. economist Michael Saunders said in an e-mailed note today.

The Engineering Employers’ Federation last week cut its U.K. manufacturing and economic growth forecasts and said the central bank will keep rates on hold until at least next year.

Sterling has fallen 6.7 percent in the past 12 months against a basket of nine major peers, according to Bloomberg Correlation-Weighted Currency Indexes. Only the dollar has weakened more, sliding 11 percent.

Gilts Gain

Ten-year gilts rose for a third day, with yields falling 14 basis points to 2.31 percent. The two-year yield was little changed at 0.55 percent, after dropping to 0.494, the lowest level since Bloomberg started collecting data on the securities in 1992.

Investors should favor 10-year gilts over German bunds after the spread between their yields widened, betting the interest-rate outlook will remain “benign,” Citigroup said.

The U.K. “may have problems in meeting the fiscal targets as the economy slows, but at least the coalition’s commitment to deficit reduction is credible,” Citigroup fixed-income strategists Nishay Patel and Aman Bansal wrote in a research note. The recent underperformance of gilts “looks a good near-term buying opportunity. Further quantitative easing would make the trade even more attractive,” they said.

Ten-year gilts yielded 43 basis points more than their German counterparts, compared with 26 basis points a week ago, the most since March 2, based on closing Bloomberg generic prices. The spread has widened from a 2011 low of eight basis points on May 4.

Gilts have returned 8.7 percent this year, compared with 6.5 percent for bunds and 8.3 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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