Pound Drops From Seven-Month High as U.K. Re-Enters Recession

The pound dropped from a seven-month high against the dollar after the U.K. economy unexpectedly slipped back into recession, backing the case for the Bank of England to extend its asset-purchase program.

The U.K. currency fell the most in two months against the euro after the Office for National Statistics said gross domestic product shrank 0.2 percent last quarter, after contracting 0.3 percent in the previous three months. Economists surveyed by Bloomberg forecast growth of 0.1 percent. Standard Chartered Plc said it was ending its bet the euro would drop against the pound after the “unexpectedly weak” growth report. Gilts declined.

“The pound is clearly selling off on the back of this data,” said John Hydeskov, chief analyst at Danske Bank A/S in London. “It could be the point where investors say ‘Hang on, are we really buying the currency from an economy also in recession, just like the euro zone?’”

The pound weakened 0.1 percent to $1.6130 at 4:17 p.m. London time after rising to $1.6171, the highest since Sept. 6. The U.K. currency fell 0.1 percent to 81.80 pence per euro after dropping as much as 0.6 percent, the most since Feb. 22. It reached 81.44 pence yesterday, the strongest since August 2010.

Short-sterling futures advanced after the GDP report as investors cut bets on higher interest rates. The implied yield on the contract expiring in June 2013 dropped four basis points to 1.09 percent.

U.K. policy makers kept their benchmark rate at 0.5 percent at their April 4-5 meeting. Bank of England officials will consider whether to extend their 325 billion-pound quantitative-easing program when they next meet on May 9-10.

Scrapping Bets

The growth report “has tempered expectations the economy will outperform,” Ned Rumpeltin, head of Group-of-10 currency strategy at Standard Chartered in London, wrote today in a note to clients. “Fundamentals still imply further medium-term declines, however we will look to re-enter at better levels,” he said.

The yield on the 10-year gilt climbed four basis points, or 0.04 percentage point, to 2.14 percent. The 4 percent bond due March 2022 declined 0.43, or 4.30 pounds per 1,000 pound face amount, to 116.45.

“Today’s U.K. GDP data was very bad,” Geoff Kendrick, head of European currency strategy at Nomura International Plc in London, wrote in an e-mailed note. “However, with the U.K. remaining AAA, I think the bigger issue is that despite negative growth, buying gilts is still more attractive than buying European paper.”

Poised to Fall

Ten-year gilt yields are poised to retreat after testing above the 50-day moving average of 2.18 percent last week, according to data compiled by Bloomberg. They may encounter so-called resistance around their April low of 2.01 percent. Resistance refers to a level where sell orders may be clustered.

Gilts have handed investors a loss of 1.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That’s the third worst performance among 26 sovereign markets tracked by the indexes after Spain and Greece.

Sterling has strengthened 1.6 percent in the past month, the best performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro dropped 0.9 percent, and the dollar slid 0.3 percent.

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