The pound slumped the most in more than two years against the euro after an industry report showed U.K. manufacturing grew less in January than economists forecast, sapping demand for Britain’s currency as a haven.
Sterling headed for its biggest weekly drop versus the common currency since June 2011 as a European report this week showed economic confidence improved in January, adding to signs the region’s debt crisis is easing. Mark Carney, who will take over as governor of the Bank of England in July, will testify to lawmakers next week. Gilts were little changed.
“The pound is in a perfect storm,” said Arne Rasmussen, the head of currency research at Danske Bank A/S in Copenhagen. “The momentum for its weakness is building as the economic outlook is poor, and the safe-haven status is diminishing given the improvement in sentiment towards the euro. With the new Bank of England’s chief testifying next week, the market is nervous.”
The pound depreciated 1.6 percent to 86.98 pence per euro at 5:19 p.m. in London, after falling as much as 1.8 percent to 87.17 pence. That’s the biggest decline since May 7, 2010, and the weakest level since Oct. 31, 2011. The currency has slumped 2 percent this week. Sterling dropped 0.8 percent to $1.5729.
Markit Economics and the Chartered Institute of Purchasing and Supply said their gauge of U.K. manufacturing output fell to 50.8 this month from a revised 51.2 in December. Economists surveyed by Bloomberg forecast a decline to 51. A reading above 50 indicates expansion.
An index of executive and consumer sentiment in the euro-area climbed to 89.2 in January, the highest since June, from 87.8 in December, the European Commission said Jan. 30.
“The pound’s weakness against the euro is likely to continue,” said Michael Derks, chief strategist at FxPro Financial Services Ltd. in London. “The decline is driven by a combination of both euro and U.K. stories. People are more optimistic about the euro and the U.K. is now less of a haven, especially when its economy is moving sideways.”
The pound has weakened 4.2 percent this year, the second-worst performer after the yen of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro strengthened 3.5 percent and the dollar dropped 0.6 percent.
Sterling extended losses against the euro even after the European Central Bank said financial institutions will repay 3.5 billion euros ($4.77 billion) of three-year loans next week that they had borrowed through the so-called Longer-Term Refinancing Operations, down from 137.2 billion euros at their first opportunity to pay back the funds this week.
The ECB, led by President Mario Draghi, will meet on Feb. 7 to set interest rates. Policy makers will keep their benchmark rate unchanged at record-low 0.75 percent, according to a Bloomberg survey.
The Bank of England will maintain its asset-purchase target at 375 billion pounds and the main interest rate at 0.5 percent the same day, separate Bloomberg surveys show.
Royal Bank of Scotland Group Plc suggested investors buy the pound against the euro, betting its slide is about to end.
Royal Bank of Scotland said Draghi’s comments at next week’s policy meeting may temporarily halt the euro’s advance.
“Recently the euro has rallied on LTRO withdrawal” and measures to contain the region’s debt crisis, Greg Gibbs, a senior currency strategist at RBS in Singapore, wrote in a note to clients. “The risk is now that the market has built all this in and that Draghi may shift to noting risks to the economic outlook.”
The 10-year gilt yielded 2.10 percent. The 1.75 percent bond maturing in September 2022 traded at 97. The rate earlier climbed to 2.12 percent. The yield rose four basis points, or 0.04 percentage point, on the week.
Gilts have lost 1.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.8 percent and Treasuries fell 0.9 percent.