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Pound Falls as Manufacturing Fuels Stimulus Bets

The pound weakened against the dollar as reports showing that U.K. manufacturing output contracted and house prices stagnated last month added weight to calls for the Bank of England to expand stimulus measures this week.

Sterling declined versus most of its 16 major peers tracked by Bloomberg as investors bet the central bank would extend its money-printing program, damping demand for the U.K currency. The Monetary Policy Committee will raise its target for bond purchases on July 5, according to the median estimate in a Bloomberg News survey. Gilts were little changed.

“Manufacturing output is shrinking and the second quarter was certainly weaker than the first, which on the margin increases the likelihood of further easing” from the Bank of England, said Chris Walker, a currency strategist at UBS AG in London. “As we get relative balance sheet expansion from the Bank of England we could see the pound pushing towards $1.50.”

The pound fell 0.2 percent to $1.5676 at 1 p.m. London time, after sliding as much as 0.4 percent. It was 0.3 percent stronger at 80.41 pence per euro.

UBS forecasts sterling will slide to $1.55 within one month and $1.50 within three months, Walker said.

A gauge of factory output was at 48.6 from 45.9 in May, Markit Economics said on its website today. The median estimate in a Bloomberg News survey of 25 economists was 46.5. A reading below 50 indicates contraction. House prices stayed unchanged from May, a Hometrack Ltd. report said.

BOE Target

The Bank of England will raise its target for bond purchases by 50 billion pounds to 375 billion pounds on July 5, according to 30 of 41 economists in a Bloomberg news survey. Eight, including UBS, predict an increase to 400 billion pounds, and the rest see a smaller gain or no change.

Data on June 28 showed gross domestic product shrank 0.3 percent in the first quarter, confirming the U.K. economy is in its first double-dip recession since the 1970s.

U.K. debt returned 2.1 percent in the first half of 2012, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2 percent, and U.S. Treasuries rose 1.7 percent.

The yield on the 10-year gilt was little changed at 1.74 percent today. It earlier slid six basis points to 1.68 percent. The 4 percent bond due March 2022 changed hands at 120.025.

The Debt Management Office plans to auction 1.75 billion pounds of bonds due in December 2030 tomorrow, and 4.5 billion pounds of notes maturing in September 2017 the following day. The agency will also offer 3.5 billion pounds of bills on June 6.

The pound has strengthened 1.5 percent in the past six months, the second-best performer after the New Zealand dollar, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies.

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