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Pound Snaps 2-Day Drop Versus Dollar After Construction Report

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Oct. 2 (Bloomberg) -- The pound strengthened against the dollar, snapping a two-day drop, as a report showed an index of U.K. construction contracted at a slower pace in September.

Gilts advanced, erasing an earlier decline, after borrowing costs fell at a sale of 3.5 billion pounds ($5.7 billion) of 10-year securities. Sterling weakened for a third day versus the euro after dropping the most in more than two weeks yesterday. A report tomorrow will show the U.K. services industry expanded for a 21st month in September, according to the median estimate of 29 economists surveyed by Bloomberg News.

“We’ve bounced a bit in pound-dollar,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “Markets will be looking forward to the services data tomorrow, which is hugely significant for sterling.”

The pound advanced 0.3 percent to $1.6175 as 4:36 p.m. London time, after touching $1.6109 yesterday, the lowest since Sept. 13. Sterling dropped 0.3 percent to 80.11 pence per euro after touching 80.18 pence, the weakest since Sept. 20.

The pound is more likely to weaken toward $1.60 this week than rally to $1.62, Stretch said.

Construction Data

A gauge of construction output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, rose to 49.5 in September from 49 a month earlier, according to a statement on Markit’s website today. The median forecast of 12 economists in a Bloomberg survey was for a reading of 49.9. A reading below 50 indicates contraction.

A similar index for the services industry will show a reading of 53, a separate survey showed before the data is released at 9:30 a.m. in London tomorrow.

Sterling gained against the U.S. currency even as a report showed U.K. house prices dropped in September. The average cost of a home declined 0.4 percent from August, the Nationwide Building Society said in a report today. From a year earlier, values fell 1.4 percent to an average 163,964 pounds.

The pound has strengthened 0.2 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 0.1 percent and the dollar weakened 3.2 percent.

The U.K. sold gilts due in September 2022 at an average yield of 1.764 percent. That compares with a yield of 1.825 percent at a similar sale on Sept. 13, and a record-low auction result of 1.719 percent on July 12.

The yield on 10-year gilts dropped two basis points, or 0.02 percentage point, to 1.72 percent, compared with the six-month average of 1.75 percent. It earlier rose as much as four basis points. The 1.75 percent security due in September 2022 rose 0.175, or 1.75 pounds per 1,000-pound face amount, to 100.27. Two-year rates were at 0.20 percent.

Gilts returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.3 percent and U.S. Treasuries rose 2.3 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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