The pound dropped the most in two weeks against the euro after an index of U.K. manufacturing declined more in September than economists forecast.
Sterling weakened versus all except two of its 16 major peers after the Bank of England said net lending for homes dropped the most in almost three years. Sterling also weakened against the euro after stress-test results bolstered confidence in Spain’s banking system and spurred demand for the single currency. Gilts fell as Fitch Ratings said U.K. government debt will peak at a higher level than earlier estimated.
“With little else to focus on today, domestic considerations may come back to the forefront” and that may weigh on the pound, said Audrey Childe-Freeman, head foreign-exchange strategist at Bank of Montreal in London.
The U.K. currency declined 0.5 percent to 79.93 pence per euro at 4:13 p.m. London time after sliding as much as 0.6 percent, the biggest drop since Sept. 14. The pound depreciated less than 0.1 percent to $1.6155.
The pound is poised to advance to $1.65 in the next three months, Childe-Freeman said.
A gauge of U.K. manufacturing, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, fell to 48.4 last month from a revised 49.6 in August. Banks granted 47,665 mortgages, compared with a revised 47,556 the prior month, the Bank of England said. Net mortgage lending slid by 276 million pounds, the biggest drop since December 2010.
The pound weakened for a second day versus the euro after stress tests commissioned by Spain and released Sept. 28 showed the nation’s banks have a capital deficit of 59.3 billion euros, less than the 62 billion euros estimated in June.
Sterling appreciated to 79.24 pence per euro on Sept. 27, the strongest level since Sept. 6.
The pound has still gained 1.6 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 3.1 percent and the dollar weakened 2.7 percent.
Britain’s efforts to cut the budget deficit are “standing still” and the pound may come under pressure if investors lose confidence in the fiscal plans and the economic recovery, Fitch Ratings Managing Director David Riley told Maryam Nemazee on Bloomberg Television’s “The Pulse” in London.
“It’s a very serious situation that the U.K. finds itself in,” Riley said. “The budget deficit for this year is going to be in excess of 8 percent, which, actually despite all of the talk of austerity, actually means the U.K. is now standing still in terms of deficit reduction.”
The benchmark 10-year gilt yield rose two basis points, or 0.02 percentage point, to 1.75 percent. The 1.75 percent bond due in September 2022 fell 0.18, or 1.80 pounds per 1,000-pound face amount, to 100.025.
The U.K. is scheduled to auction as much as 3.5 billion pounds of the securities tomorrow.
Overseas investors boosted holdings of U.K. government bonds for a second month in August, the Bank of England said. Non-residents bought 5.6 billion pounds more gilts than they sold, after raising holdings by 9.36 billion pounds in July, data published today showed.
Gilts returned 3.2 percent this year through Sept. 28, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.3 percent and U.S. Treasuries earned 2.3 percent.