July 9 (Bloomberg) -- The pound fell to a three-year low against the dollar after U.K. manufacturing unexpectedly shrank in May, casting doubt on the strength of the recovery.
Sterling weakened versus all but two of its 16 major peers even as data showed a house-price gauge rose to the highest since January 2010 last month and retail sales climbed. Bank of England policy makers led by Governor Mark Carney signaled last week they will keep U.K. interest rates at a record low. U.K. government bonds advanced for a second day as investors sought safer assets. The Debt Management Office sold index-linked gilts maturing in 2029.
“The pound’s fallen after the data,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “We’ve had some fairly robust data recently so for this to be negative is a little bit of a punch in the stomach for the pound. It’s not looking particularly great for sterling right now.”
The pound slipped 0.8 percent to $1.4832 at 4:42 p.m. London time after dropping to $1.4814, the lowest since since June 23, 2010. The U.K. currency was little changed at 86.08 pence per euro and touched 86.69 pence, the weakest level since March 14.
Sterling pared its decline versus the euro after European Central Bank Executive Board Member Joerg Asmussen signaled monetary policy will remain accommodative for more than a year, undermining demand for the 17-nation currency.
Sterling has weakened 1.4 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar strengthened 4 percent and the euro was little changed.
Factory output fell 0.8 percent from April, when it declined 0.2 percent, the Office for National Statistics said in London. The median forecast of 25 economists in a Bloomberg News survey was a 0.4 percent increase.
“We are sceptical that these data truly reflect the state of the manufacturing sector,” Brian Hilliard, a U.K. economist at Societe Generale SA in London wrote in a note to clients. “We look for a bounce in June.”
The housing-price index increased to 21 in June from 5 a month earlier, the London-based Royal Institution of Chartered Surveyors said, citing a monthly poll of property surveyors. A positive number means more respondents saw values increase rather than decline. The British Retail Consortium said like-for-like retail sales rose an annual 1.4 percent in June.
U.K. data last week showed an index of manufacturing expanded more in June than economists estimated and house prices climbed to the highest level in almost three years.
“There is a lot of evidence that the U.K. economy is now beginning to gather some momentum,” Louise Cooper, an analyst at CooperCity in London, said on Bloomberg Television’s “Countdown” with Anna Edwards and Mark Barton. “The problem with economic data is that it is very difficult to pick a trend out of it. What the economy desperately needs is growth.”
The benchmark 10-year gilt yield fell five basis points, or 0.05 percentage point, to 2.43 percent after climbing to 2.59 percent on June 24, the highest since October 2011. The 1.75 percent security due September 2022 rose 0.39, or 3.90 pounds per 1,000-pound face amount, to 94.42.
The U.K. sold 1.4 billion pounds of index-linked gilts due in March 2029 at an average yield of minus 0.043 percent. The securities were last auctioned on April 24 at minus 0.635 percent.
The 15-year break-even rate, a gauge of market inflation expectations derived from the yield difference between gilts and index-linked securities, fell for a second day. It narrowed five basis points to 3.17 percentage points after reaching 3.26 yesterday, the widest since April 12.
Gilts handed investors a loss of 3.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.4 percent and Treasuries declined 3.5 percent, the indexes show.
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