The pound posted its biggest weekly decline against the euro in almost three months and gilts dropped as French and Spanish borrowing costs fell at their first debt auctions after their credit ratings were cut.
The yield on 10-year gilts rose the most in four months as demand for the relative safety of AAA government bonds eased amid signs global growth hasn’t lost momentum. Reports this week showed U.K. retail sales rebounded in December while U.S. initial jobless claims fell to the least in almost four years. Further advances in gilt yields may be limited next week before a report predicted to show the U.K. economy contracted in the fourth quarter of last year.
“There are worries that the U.K. economy is heading back into recession,” said Michael Derks, chief strategist at FXPro Financial Services Ltd. in London. “It would not be surprising to see further weakness of the pound against euro in the near term.”
The pound weakened 0.5 percent to 83.21 pence per euro at 5:40 p.m. London time yesterday, the biggest weekly drop since a 0.7 percent decline in the period ending Oct. 28. It gained 1.5 percent to 119.60 yen, snapping a three-week slide. Sterling gained 1.4 percent to $1.5538.
The pound rose 1.6 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen gained 7.7 percent and the dollar advanced 6.7 percent.
The yield on the 10-year gilt climbed 14 basis points to 2.11 percent, the biggest gain since the five days ending Sept. 16.
U.K. gross domestic product fell 0.1 percent from the third quarter, when it rose 0.6 percent, according to the median of 33 economist forecasts in a Bloomberg News survey.
France sold 7.97 billion euros ($100.3 billion) of notes on Jan. 19 with the average yield on the benchmark two-year notes sliding to 1.05 percent from 1.58 percent in an October sale. Spain issued 6.61 billion euros in bonds maturing in 2022, 2019 and 2016, more than its maximum target of 4.5 billion euros.
The sales came after S&P on Jan. 13 stripped France of its AAA rating and cut Spain by two levels to A. The U.K. has the top rating at all three main credit-rating companies.
The Debt Management Office plans to sell a 3.75 percent gilt maturing in 2052 through banks next week.