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Pound Snaps Six-Day Advance as Factory Growth Slows

City of London
Boats sit on the River Thames as St. Paul's Cathedral, left, and skyscrapers in the City of London stand against the skyline in London. The phrase “Cool Britannia” was used in the late 1990s to depict a period of renewed optimism in the U.K. Photographer: Matthew Lloyd/Bloomberg

April 1 (Bloomberg) -- The pound weakened for the first time in seven days against the dollar after an industry report showed U.K. manufacturing expanded at a slower pace last month than economists forecast.

The U.K. currency fell versus most of its 16 major peers as Bank of England officials said an abrupt increase in interest rates posed a risk to financial stability. Sterling also declined as Glasgow-based Weir Group Plc made a bid for Finland’s Metso Oyj in a deal the Times said valued the company at more than 3 billion pounds ($4.99 billion). Sterling has strengthened against the dollar every April for nine years, data compiled by Bloomberg show. U.K. government bonds fell.

“The pound erased earlier gains after the manufacturing data, which came in weaker than expected,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The headline number was actually not bad but the market reaction suggested a lot of good news about the U.K. economy has already been in the price.”

The pound declined 0.1 percent to $1.6649 at 4:18 p.m. London time after strengthening 1.1 percent during the previous six days. The U.K. currency weakened 0.4 percent to 82.95 pence per euro, the biggest decline since March 10.

An index for British manufacturing based on a survey of purchasing managers fell to 55.3, the lowest since July, from a revised 56.2 in February, Markit Economics said in London. The median estimate of analysts in a Bloomberg News survey was for a reading of 56.7. A level above 50 indicates expansion.

Financial Stability

Minutes of the Bank of England’s Financial Policy Committee meeting published today showed officials saying it would be difficult to assess the impact of higher interest rates.

While “market participants expected a shift in monetary stance at some point in the future,” the eventual transition “could pose challenges in some sectors of the financial markets, particularly if global monetary policy stances were to adjust more abruptly than expected,” the minutes of the March 19 meeting showed.

Pressure-pump manufacturer Weir, whose market value of 5.3 billion pounds is about 50 percent higher than that of Metso, which makes rock crushers, proposed an all-share merger to Metso’s board, it said in a statement. Metso, which earlier said it’s considering an unsolicited approach by Weir, jumped as much as 22 percent in Helsinki trading.

Citigroup Bullish

The pound will probably extend gains on the back of the U.K. economic recovery, according to Citigroup Inc.

“As the inflation outlook continues to fall for Europe, we expect interest-rate differentials will continue to exert influence on capital flows,” Citigroup analysts including Richard Cochinos in New York wrote in a research note. “A long sterling position is again becoming a macro staple,” they said, referring to a bet an asset will rise.

Citigroup predicts the pound will strengthen to $1.73 by year-end. The currency will fall to $1.63 by Dec. 31, according to the median estimate of economists compiled by Bloomberg.

The yield on the benchmark 10-year gilt climbed one basis point, or 0.01 percentage point, to 2.74 percent. The 2.25 percent bond due in September 2023 fell 0.045, or 45 pence per 1,000-pound face amount, to 95.94.

Gilts returned 2.3 percent in the first quarter, the best start to a year since 1998, according to indexes compiled by Bank of America Merrill Lynch. Treasuries gained 1.6 percent and German securities rose 2.7 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Mark McCord

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