Pound Declines Against Euro as Moody’s Cuts U.K. Growth Forecast

The pound fell against the euro, snapping a three-day gain, after Moody’s Investors Service cut its forecast for U.K. economic growth and said the government will struggle to meet its debt-reduction targets.

Sterling weakened versus all except two of its 16 major counterparts as an industry report showed U.K. consumer confidence stalled this month as the recession deepened. U.K. government bonds rose as investors sought safer assets. The Bank of England will keep its asset-purchase program on hold and leave interest rates unchanged when it meets on Aug. 2, according to a Bloomberg News survey.

“The fundamentals are negative for the pound and we see it weakening further,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The longer the period of economic stagnation goes on, the greater emphasis there is on the government to change its fiscal program.”

The pound dropped 0.6 percent to 78.49 pence per euro at 4:36 p.m. London time after falling as much as 0.8 percent. The U.K. currency depreciated 0.2 percent to $1.5685.

Today’s decline wiped out sterling’s gain this month. The pound has fallen 0.2 percent in July, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro dropped 3.1 percent and the dollar was little changed.

‘Rising Challenges’

“Moody’s sees rising challenges in achieving debt reduction within the timeframe that has been laid out by the government,” the company said in a credit opinion. Still, it “believes that the U.K. government’s response to negative developments late last year indicates it commitment to restoring a sustainable debt position.”

An index of consumer confidence stayed at minus 29 in July, London-based research group GfK NOP Ltd. said in a report. The gauge has been in a range of minus 29 to minus 31 for the past seven months.

The yield on the 10-year gilt fell seven basis points, or 0.07 percentage point, to 1.47 percent after dropping to a record 1.407 percent on July 23. The 4 percent bond maturing in March 2022 rose 0.73, or 7.30 pounds per 1,000-pound face amount, to 122.595.

The pound is likely to find so-called support at around 79.09 pence per euro, the 38.2 percent retracement of its rally from June to July, said Karen Jones, head of fixed-income, currency and commodity technical analysis at Commerzbank AG in London, citing Fibonacci theory.

Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. Support refers to an area where buy order may be clustered.

Barclays Forecast

Barclays Plc changed its forecast for Bank of England policy, and now predicts policy makers will increase asset purchases and cut interest rates in November.

The central bank will raise its target for bond purchases by 50 billion pounds to 425 billion pounds, London-based economist Simon Hayes wrote in a note to clients. The company’s previous forecast was for no change. The Bank of England will lower its key rate by a quarter point to 0.25 percent, he wrote.

The Debt Management Office said it will sell 1.5 billion pounds of 5 percent notes due in 2014 through banks on Aug. 9.

U.K. government bonds have returned 1.5 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 1.4 percent, and U.S. Treasuries rose 1 percent.

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