Pound Within 0.4% of 5-Week Low Versus Euro as Home Prices Stall

The pound was within 0.4 percent of a five-week low against the euro after an industry report showed U.K. house prices stagnated this month, adding to evidence Britain’s economic recovery is losing momentum.

Sterling headed for a fourth monthly decline versus the 17-nation currency as a rallies in Spanish and Italian bonds in November, damped demand for the U.K. currency as a haven from Europe’s debt crisis. House values may drop “modestly” over the next year because of subdued wage growth, Nationwide Building Society said. Gilts held gains from yesterday after the Bank of England said overseas investors increased their holdings of U.K. government bonds last month.

“The picture for sterling is going to turn more negative,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “Sterling has been relatively well supported by safe-haven flows from Europe but these flows are slowing. That is going to expose sterling to its underlying fundamentals, which I don’t think are positive.”

The pound was little changed at 80.85 pence per euro at 4:56 p.m. London time after depreciating to 81.14 pence on Nov. 27, the weakest since Oct. 24. The currency gained 0.1 percent to $1.6025, having dropped 0.6 percent this month.

Sterling will weaken to 83 pence per euro by the end of March, Morgan Stanley’s Stannard said.

The average cost of a U.K. home was 163,853 pounds in November, Swindon, England-based Nationwide said in an e-mailed statement. From a year earlier, prices declined 1.2 percent.

‘Decline Modestly’

“House prices are likely to remain broadly flat or decline modestly over the next 12 months,” the company’s chief economist Robert Gardner said in the statement. Mortgage approvals increased for a fourth month in October, the Bank of England said yesterday.

Spain’s 10-year bond yield dropped to the lowest level in eight months today, while similar-maturity Italian yields declined to the least in two years. The Stoxx Europe 600 Index of shares gained 1.2 percent.

Spanish bonds have returned 1.9 percent this month and Italy’s have gained 2.4 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.K. gilts gained 0.7 percent.

Sterling has dropped 0.4 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. It has still appreciated 1.3 percent this year as the euro-area debt crisis spurred demand for safer assets.

Non-residents bought 4.31 billion pounds more gilts than they sold last month, after increasing their holdings by 1.84 billion pounds in September, the Bank of England said.

The yield on the benchmark 10-year gilt fell two basis points to 1.75 percent after dropping eight basis points, or 0.08 percentage point yesterday. The 1.75 percent bond maturing in September 2022 traded at 99.99.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE