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Pound Slides to Three-Week Low as Production Drops; Gilts Rise

The pound slumped to a three-week low against the dollar after a government report showed industrial production declined in August, casting doubt on the strength of the economy in the third quarter.

The U.K. currency weakened at least 0.2 percent versus all of its 16 major counterparts as separate data showed the goods-trade deficit improved less than economists forecast. U.K. government bonds rose for a third day. Economists predict the Bank of England will keep its benchmark interest rate at a record low when it announces its policy decision tomorrow.

“There’s a sense of disappointment in today’s data, which has weighed on the pound,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The pace of economic recovery in the U.K. may prove slightly less robust than anticipated.”

The pound fell 0.9 percent to $1.5942 at 4:36 p.m. London time after dropping to $1.5920, the lowest since Sept. 18. The U.K. currency slipped 0.5 percent to 84.80 pence per euro after depreciating to 84.87, the weakest level since Sept. 3.

Sterling declined 1.4 percent in the past week, the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 0.6 percent and the euro gained 0.1 percent.

Output Slides

Industrial output dropped 1.1 percent from July, when it increased 0.1 percent, the Office for National Statistics said. The goods-trade deficit narrowed to 9.63 billion pounds in August from a revised 9.94 billion pounds, the office said in a separate report. Economists in a Bloomberg survey predicted the deficit would shrink to 8.85 billion pounds.

Citigroup Inc.’s Economic Surprise Index for the U.K. dropped to 28.1, the lowest since July 16. The gauge, which shows whether data beat or fell short of economists’ forecasts, climbed to a nine-month high of 113.30 on Aug. 19.

The pound is reversing gains that saw it jump 4.4 percent versus the dollar in September as improving economic data prompted investors to increase bets the Bank of England would raise borrowing costs earlier than it predicted.

“The pound is being driven lower by the weak data,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. This “is in stark contrast to the strong U.K. figures we saw during the summer.”

Finding Base

Sterling is likely to find a base around $1.59 to $1.5950 and the current level offers an opportunity to enter a bet the currency will strengthen, according to Credit Agricole SA.

As long as the currency holds above $1.59 that means it isn’t entering a new downtrend, said Manuel Oliveri, a foreign-exchange strategist in London. The industrial production data was not a “game changer,” he said.

The yield on the benchmark 10-year gilt fell one basis point, or 0.01 percentage point, to 2.68 percent after dropping to 2.65 percent, the lowest level since Aug. 27. The 2.25 percent bond due September 2023 rose 0.115, or 1.15 pounds per 1,000-pound face amount, to 96.26.

Gilts handed investors a loss of 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.8 percent and U.S. Treasuries declined 2.5 percent.

The Bank of England will leave its key interest rate at 0.5 percent and its bond-purchase target as 375 billion pounds, according to two surveys of economists. The central bank, which will announce the decisions at noon, has said it will keep the benchmark rate unchanged until unemployment, currently at 7.7 percent, falls below 7 percent.

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