Pound Drops Against Euro as U.K. Inflation Slows; Gilts Decline

The pound fell to a one-month low versus the euro after data showed U.K. inflation slowed to the least in almost three years last month, boosting speculation the Bank of England will add more stimulus to the economy.

Ten-year gilt yields climbed to the highest level in three weeks after two senior German coalition lawmakers said the nation is open to Spain seeking a precautionary credit line from Europe’s rescue fund, curbing demand for the safest government assets. U.K. consumer prices rose 2.2 percent from a year earlier, down from a 2.5 percent increase in August, a report showed today. Minutes of the Bank of England’s Monetary Policy Committee’s October meeting will be published tomorrow.

“Inflation is on track to fall under 2 percent and so there’s not much for the Bank of England to do other than to add stimulus,” said Peter Frank, a foreign-exchange strategist at Banco Bilbao Vizcaya Argentaria SA in London. “There’s plenty of room for the Bank of England to do more.”

The pound depreciated 0.4 percent to 80.91 pence per euro as of 5:24 p.m. London time, after reaching 81.03 pence, the weakest level since Sept. 17. Sterling strengthened 0.3 percent to $1.6116, after reaching $1.6133, the highest since Oct. 8.

September’s consumer price reading was the lowest since November 2009, the Office for National Statistics said in London and matched the median forecast of 37 economists in a Bloomberg News survey.

Bond Purchases

The central bank’s current round of bond purchases finishes next month and officials will decide at their Nov. 7-8 meeting whether to increase the target from 375 billion pounds.

Britain’s economy will shrink 0.3 percent this year, according to a Bloomberg survey of economists’ forecasts. That compares with 2.1 percent growth in the U.S. and a 0.5 percent decline in the euro-region. Third-quarter U.K. gross domestic product data is due to be released on Oct. 25.

Investors should sell the pound against the dollar before the growth data next week, Nordea Bank AB analysts led by Jonas Thulin in Stockholm wrote in an e-mailed report today. The strategists recommend selling sterling at $1.6056, targeting a 1.7 percent drop to $1.5788. The trade should be exited should the pound advance to $1.6177, they wrote.

The pound has weakened 0.7 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 2.7 percent and the dollar dropped 4 percent.

Gilts Fall

U.K. government bonds fell after the report on Spain boosted speculation the nation may seek a sovereign bailout and curbed demand for the safest assets.

U.K. 10-year gilt yields climbed six basis points, or 0.06 percentage point, to 1.82 percent. They reached 1.83 percent, the highest since Sept. 25. The 1.75 percent security, maturing in September 2022, fell 0.55, or 5.50 pounds per 1,000-pound face amount, to 99.365.

The views of German lawmakers are critical because they would have to ratify any aid request under parliamentary rules. Spain has cited concern of German rejection for its reluctance so far to seek bailout funds, a condition for triggering European Central Bank help to lower borrowing costs.

Gilts returned 3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.2 percent and U.S. Treasuries earned 2.2 percent.

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