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Pound Drops the Most in Four Months as Rally Wanes on Rate Bets

July 26 (Bloomberg) -- The pound declined the most in four months against the dollar this week as a rally that made it the best-performing currency in the past year was deemed to be losing momentum.

Sterling fell below $1.70 for the first time in a month after retail sales increased less than economists forecast and comments from the Bank of England damped investor expectations for higher borrowing costs. Benchmark 10-year gilt yields dropped to the lowest in eight weeks as central bank Governor Mark Carney said this week that rate increases would be more restrained than in the past as “extraordinary forces” were still confronting the British economy.

“We have now seen the break of the psychological $1.70, which is key,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “The retail-sales figures highlight the fact that maybe the pound has been a little bit overbought in 2014. Anything other than great news seems to be viewed as bad news for the pound right now.”

The pound dropped 0.7 percent to $1.6970 at 5 p.m. London time, the biggest weekly decline since March 21. It reached $1.7192 on July 15, the highest since October 2008. Sterling was little changed at 79.14 pence per euro.

The U.K. currency has gained 11 percent in the past year, making it the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as investors bet the Bank of England would raise borrowing costs sooner than forecast.

BOE Minutes

Minutes from the BOE’s July policy meeting published on July 23 signaled officials discussed emphasizing wages as an indicator of future inflation as data last week showed pay excluding bonuses rose in the three months through May at the slowest pace since 2001.

The pound fell even after gross domestic product expanded for a sixth quarter in the three months through June.

The yield on benchmark 10-year gilts was little changed at 2.57 percent. The rate dropped to 2.54 percent on July 23, the lowest since May 29. The price of the 2.25 percent bond maturing in September 2023 was at 97.415.

Consumer confidence in the U.K. was at the highest in 12 years, economists forecast in a Bloomberg survey before the report is published on July 31. Separate data will show manufacturing output in the U.K. continued to expand, analysts predicted. The Debt Management Office will sell new inflation-linked gilts maturing in 2058 through banks next week, subject to market conditions.

Gilts returned 4.5 percent this year through July 24, Bloomberg World Bond Indexes show. That compares with a 5.3 percent gain for German securities and 3.3 percent for Treasuries.

To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net

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

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